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Intensity Based Estimation of Extreme Loss Event Probability and Value-at-Risk
Year Of Publication: 2010
Month Of Publication: April
Pages: 29
Download Count: 5
View Count: 2027
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 7-26-2010
Publisher: Administrator
Summary
We develop a methodology for the estimation of Extreme Loss Event Probability and the Value-at-Risk, that takes into account both the magnitudes and the intensity of the extreme losses. Speci cally, the extreme loss magnitudes are modeled with a Generalized Pareto Distribution, while their intensity is captured by an Autoregressive Conditional Duration model, a type of Self-Exciting Point Process. This allows for an explicit interaction between the magnitude of the past losses and the intensity of future extreme losses. The intensity is further used in the estimation of Extreme Loss Event Probability. The method is illustrated and backtested on 10 assets and compared with the established and baseline methods. The results show that our method outperforms the baseline methods, competes with an established method, and provides additional insight and interpretation into the prediction of extreme loss event probability.
This document is published in Applied Stochastic Models in Business and Industry.
http://dx.doi.org/10.1002/asmb.1915
Author(s)
Hamidieh, Kamal Sign in to follow this author
Stoev, Stilian Sign in to follow this author
Michailidis, George Sign in to follow this author
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