IDEAS home Printed from
   My bibliography  Save this paper

Extreme Value Theory and the Financial Crisis of 2008


  • James P. Gander


The paper offers an alternative approach to analyzing stock market time series data. The purpose is to develop descriptive, more intuitive, and closer to reality analogs of the behavior of US stock market prices, as indexed by the S&P500 stock price index covering the period October 2003 to October 2008. One analog developed is the “escalator principle” and the blind man. The approach is to treat prices as a random and independent variable and use extreme value theory to judge probabilistically whether prices and their attributes are from an initial universe or whether there has been a regime change. The attributes include the level, first difference, second difference and third difference of the ordered price series. Various graphing tools are used, such as, probability paper and different specifications of exponential functions representing cumulative probability distributions. The argument is that traditional time-series analysis implies a given universe, usually normal with either a constant or time-dependent variance (or measureable risk) and consequently does not handle well uncertainty (non-measureable risk) due to regime changes. The analogs show the investor how to determine when a regime change has likely occurred.

Suggested Citation

  • James P. Gander, 2009. "Extreme Value Theory and the Financial Crisis of 2008," Working Paper Series, Department of Economics, University of Utah 2009_03, University of Utah, Department of Economics.
  • Handle: RePEc:uta:papers:2009_03

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    2. Beja, Avraham & Goldman, M Barry, 1980. " On the Dynamic Behavior of Prices in Disequilibrium," Journal of Finance, American Finance Association, vol. 35(2), pages 235-248, May.
    3. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters,in: THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78 World Scientific Publishing Co. Pte. Ltd..
    Full references (including those not matched with items on IDEAS)

    More about this item


    S&P500; Probability; Regime; Uncertainty;

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uta:papers:2009_03. 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: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.