Working Papers, Department of Economics, Lund University
No 2001:18:
Managing Extreme Risks in Tranquil and Volatile Markets Using Conditional Extreme Value Theory
Hans Byström ()
Abstract: Financial risk management typically deals with low
probability events in the tails of asset price distributions. In order to
capture the behavior of these tails, one should therefore rely on models
that explicitly focus on the tails. Extreme value theory (EVT) based models
do exactly that, and in this paper we apply both unconditional and
conditional EVT models to the management of extreme market risks in stock
markets. We find conditional EVT models to give particularly accurate
Value-at-Risk measures, and a comparison with traditional (GARCH)
approaches to calculate Value-at-Risk demonstrates EVT as being the
superior approach both for standard and more extreme Value-at-Risk
quantiles.
Keywords: Value-at-Risk; conditional extreme value theory; GARCH; backtesting; (follow links to similar papers)
JEL-Codes: C22; C53; G19; (follow links to similar papers)
23 pages, October 15, 2001
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- This paper is published as:
-
Byström, Hans, (2004), 'Managing Extreme Risks in Tranquil and Volatile Markets Using Conditional Extreme Value Theory', International Review of Financial Analysis, Vol. 13, No. 2, pages 133-152
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