Document Type

Conference Proceeding

Publisher

The Econometric Society

Faculty

Faculty of Business and Law

School

School of Accounting, Finance and Economics / Finance, Economics, Markets and Accounting Research Centre

RAS ID

12949

Comments

This is an Author's Accepted Manuscript of: Allen, D. E., Singh, A. K., & Powell, R. (2011). Extreme market risk -an extreme value theory approach. Paper presented at the 2011 Australasian Meeting of the Econometric Society. Adelaide, Australia. Available here

The copyright to this article is held by the Econometric Society, http://www.econometricsociety.org/. It may be downloaded, printed and reproduced only for personal or classroom use. Absolutely no downloading or copying may be done for, or on behalf of, any for-profit commercial firm or for other commercial purpose without the explicit permission of the Econometric Society.

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.

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free_to_read

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