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Extreme spectral risk measures : an application to futures clearinghouse margin requirements

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  • John Cotter
  • Kevin Dowd

Abstract

This paper applies the Extreme-Value (EV) Generalised Pareto distribution to the extreme tails of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses tail estimators from these contracts to estimate spectral risk measures, which are coherent risk measures that reflect a user’s risk-aversion function. It compares these to VaR and Expected Shortfall (ES) risk measures, and compares the precision of their estimators. It also discusses the usefulness of these risk measures in the context of clearinghouses setting initial margin requirements, and compares these to the SPAN measures typically used.

Suggested Citation

  • John Cotter & Kevin Dowd, 2005. "Extreme spectral risk measures : an application to futures clearinghouse margin requirements," Centre for Financial Markets Working Papers 10197/1169, Research Repository, University College Dublin.
    • Handle: RePEc:rru:cfmwps:10197/1169
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    File URL: http://hdl.handle.net/10197/1169
    File Function: First version, 2005
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    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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