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Extreme Spectral Risk Measures: An Application to Futures Clearinghouse Margin Requirements

  • John Cotter

    (University College Dublin, Ireland)

  • Kevin Dowd

    (The University of Nottingham, UK)

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.

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File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp200516.pdf
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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 200516.

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Length: 35 pages
Date of creation: 24 Jun 2011
Date of revision:
Handle: RePEc:ucd:wpaper:2005/16
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  1. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-26, March.
  2. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
  3. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
  4. Carlo Acerbi & Dirk Tasche, 2001. "Expected Shortfall: a natural coherent alternative to Value at Risk," Papers cond-mat/0105191, arXiv.org.
  5. Acerbi, Carlo, 2002. "Spectral measures of risk: A coherent representation of subjective risk aversion," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1505-1518, July.
  6. Ser-Huang Poon, 2004. "Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 581-610.
  7. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
  8. Robert R. Bliss & Nikolaos Panigirtzoglou, 2004. "Option-Implied Risk Aversion Estimates," Journal of Finance, American Finance Association, vol. 59(1), pages 407-446, 02.
  9. W. Breymann & A. Dias & P. Embrechts, 2003. "Dependence structures for multivariate high-frequency data in finance," Quantitative Finance, Taylor & Francis Journals, vol. 3(1), pages 1-14.
  10. G. Geoffrey Booth & John Paul Broussard & Teppo Martikainen & Vesa Puttonen, 1997. "Prudent Margin Levels in the Finnish Stock Index Futures Market," Management Science, INFORMS, vol. 43(8), pages 1177-1188, August.
  11. Giannopoulos, Kostas & Tunaru, Radu, 2005. "Coherent risk measures under filtered historical simulation," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 979-996, April.
  12. Broussard, John Paul, 2001. "Extreme-value and margin setting with and without price limits," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(3), pages 365-385.
  13. Cotter, John, 2000. "Margin Exceedences for European Stock Index Futures using Extreme Value Theory," MPRA Paper 3534, University Library of Munich, Germany, revised 2001.
  14. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
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