Extreme market risk and extreme value theory

Abhay K. Singh, David E. Allen, Powell J. Robert

Research output: Contribution to journalArticleResearchpeer-review

Abstract

The phenomenon of the occurrence of rare yet extreme events, "Black Swans" in Taleb's terminology, seems to be more apparent in financial markets around the globe. This means there is not only a need to design proper risk modelling techniques which can predict the probability of risky events in normal market conditions but also a requirement for tools which can assess the probabilities of rare financial events; like the recent global financial crisis (2007-2008). An obvious candidate, when dealing with extreme financial events and the quantification of extreme market risk is extreme value theory (EVT). This proves to be a natural statistical modelling technique of relevance. Extreme value theory provides well-established statistical models for the computation of extreme risk measures like the return level, value at risk and expected shortfall. In this paper we apply univariate extreme value theory to model extreme market risk for the ASX-All Ordinaries (Australian) index and the S&P-500 (USA) Index. We demonstrate that EVT can be successfully applied to financial market return series for predicting static VaR, CVaR or expected shortfall (ES) and expected return level and also daily VaR using a GARCH(1,1) and EVT based dynamic approach.

LanguageEnglish
Pages310-328
Number of pages19
JournalMathematics and Computers in Simulation
Volume94
DOIs
Publication statusPublished - Aug 2013
Externally publishedYes

Fingerprint

Extreme Value Theory
Extremes
Expected Shortfall
Financial Markets
Conditional Value at Risk
Extreme Events
Financial Crisis
Globe
Value at Risk
Rare Events
Generalized Autoregressive Conditional Heteroscedasticity
Risk Measures
Statistical Modeling
Terminology
Quantification
Statistical Model
Univariate
Market
Predict
Series

Keywords

  • Expected shortfall
  • Extreme value theory
  • GARCH
  • Risk modelling
  • Value at risk

Cite this

Singh, Abhay K. ; Allen, David E. ; Robert, Powell J. / Extreme market risk and extreme value theory. In: Mathematics and Computers in Simulation. 2013 ; Vol. 94. pp. 310-328.
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Extreme market risk and extreme value theory. / Singh, Abhay K.; Allen, David E.; Robert, Powell J.

In: Mathematics and Computers in Simulation, Vol. 94, 08.2013, p. 310-328.

Research output: Contribution to journalArticleResearchpeer-review

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