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Extreme Value Theory as an Alternative to Quantifying Market Risks
Year Of Publication: 2008
Month Of Publication: February
Resource Link: Click here to open
Pages: 34
Download Count: 2
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 12-13-2008
Publisher: Administrator
Summary
From the advent of the Basel Capital Accord Value-at-Risk (VaR) has become the common measure to quantify market risk. It is defined as the maximum potential loss a position can record with a given probability over a certain time horizon. As regulators do not demand a specified methodology to calculate VaR, the development sharp schemes emerges as a task of the utmost relevance.VaR is widely calculated from representations assuming that variations in the value of assets are normally distributed, conditional on past information. However, as empirical returns usually exhibit fat-tailed leptokurtic distributions, gaussianity could render severe underestimation of true risk. This failure triggered the surge of schemes accounting for this effect, of which heavy tailed distributions like Student-t(d) are an example. Even though relative improvements are eventually verified, the symmetrical nature of these models still acts as a drawback.The present study addresses this situation employing Extreme Value Theory on the Argentine stock market under the benchmark constituted by GARCH-like specifications and Historical Simulation to find that analysis of extremes can potentially contribute to a more accurate estimation of violent market swings.
Author(s)
Rossignolo, Adrián Sign in to follow this author
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