Improving Modeling of Extreme Events using Generalized Extreme Value Distribution or Generalized Pareto Distribution with Mixing Unconditional Disturbances
In this paper an alternative non-parametric historical simulation approach, the Mixing Unconditional Disturbances model with constant volatility, where price paths are generated by reshuffling disturbances for S&P 500 Index returns over the period 1950 - 1998, is used to estimate a Generalized Extreme Value Distribution and a Generalized Pareto Distribution. An ordinary back-testing for period 1999 - 2008 was made to verify this technique, providing higher accuracy returns level under upper bound of the confidence interval for the Block Maxima and the Peak-Over Threshold approaches with Mixing Unconditional Disturbances. This method can be an effective tool to create value for stress-testing valuation.
|Date of creation:||Sep 2009|
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"Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
98-081, New York University, Leonard N. Stern School of Business-.
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