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Extreme Value Theory: Value at Risk and Returns Dependence Around the World

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  • Viviana Fernández

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Abstract

This paper presents two applications of Extreme Value Theory (EVT) to financial markets: computation of value at risk and assets returns dependence under extreme events (i.e. tail dependence). We use a sample comprised of the United States, Europe, Asia, and Latin America. Our main findings are the following. First, on average, EVT gives the most accurate estimates of value at risk. Second, tail dependence decreases when filtering out heteroscedasticity and serial correlation by multivariate GARCH models. Both findings are in agreement with previous research in this area for other financial markets.

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  • Viviana Fernández, 2003. "Extreme Value Theory: Value at Risk and Returns Dependence Around the World," Documentos de Trabajo 161, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:161
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    File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120030625160712.pdf
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    1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    2. Poon, Ser-Huang & Rockinger, Michael & Tawn, Jonathan, 2001. "New Extreme-Value Dependence Measures and Finance Applications," CEPR Discussion Papers 2762, C.E.P.R. Discussion Papers.
    3. Robert Engle, 2001. "GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 157-168, Fall.
    4. Engle, Robert F & Gonzalez-Rivera, Gloria, 1991. "Semiparametric ARCH Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(4), pages 345-359, October.
    5. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
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    1. repec:wsi:rpbfmp:v:10:y:2007:i:01:n:s0219091507000957 is not listed on IDEAS

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