Risk Premium: Insights Over The Threshold

José Fernandes, Augusto Hasman (augustohasman@gmail.com) and Juan Peña

No 126, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The aim of this paper is twofold: First to test the adequacy of Pareto distributions to describe the tail of financial returns in emerging and developed markets, and second to study the possible correlation between stock market indices observed returns and return’s extreme distributional characteristics measured by Value at Risk and Expected Shortfall. We test the empirical model using daily data from 41 countries, in the period from 1995 to 2005. The findings support the adequacy of Pareto distributions and the use of a log linear regression estimation of their parameters, as an alternative for the usually employed Hill’s estimator. We also report a significant relationship between extreme distributional characteristics and observed returns, especially for developed countries.

Date: 2006-12
New Economics Papers: this item is included in nep-rmg
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Journal Article: Risk premium: insights over the threshold (2007)
Working Paper: Risk premium: insights over the threshold (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:126

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