The Extreme Value Theory as a Tool to Measure Market Risk
Assessing the extreme events is crucial in financial risk management. All risk managers and financial institutions want to know the risk of their portfolio under rare events scenarios. We illustrate a multivariate market risk estimating method which employs Monte Carlo simulations to estimate Value-at-Risk (VaR) for a portfolio of 4 stock exchange indexes from Central Europe. The method uses the non-parametric empirical distribution to capture small risks and the parametric Extreme Value theory to capture large and rare risks. We compare estimates of this method with historical simulation and variance-covariance method under low and high volatility samples of data. In general historical simulation method overestimates the VaR for extreme events, while variance-covariance underestimates it. The method that we illustrate gives a result in between because it considers historical performance of the stocks and also corrects for the heavy tails of the distribution. We conclude that the estimate method that we illustrate here is useful in estimating VaR for extreme events, especially for high volatility times.
|Date of creation:||Jul 2011|
|Date of revision:||Jul 2011|
|Contact details of provider:|| Postal: |
Phone: +420 2 222112330
Fax: +420 2 22112304
Web page: http://ies.fsv.cuni.cz/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
When requesting a correction, please mention this item's handle: RePEc:fau:wpaper:wp2011_26. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lenka Herrmannova)
If references are entirely missing, you can add them using this form.