Statistics of extreme events in risk management: The impact of the subprime and global financial crisis on the German stock market

Rodrigo Herrera and Bernhard Schipp

The North American Journal of Economics and Finance, 2014, vol. 29, issue C, 218-238

Abstract: Given the growing need for managing financial risk and the recent global crisis, risk prediction is a crucial issue in banking and finance. In this paper, we show how recent advances in the statistical analysis of extreme events can provide solid methodological fundamentals for modeling extreme events. Our approach uses self-exciting marked point processes for estimating the tail of loss distributions. The main result is that the time between extreme events plays an important role in the statistical analysis of these events and could therefore be useful to forecast the size and intensity of future extreme events in financial markets. We illustrate this point by measuring the impact of the subprime and global financial crisis on the German stock market in extenso, and briefly as a benchmark in the US stock market. With the help of our fitted models, we backtest the Value at Risk at various quantiles to assess the likeliness of different extreme movements on the DAX, S&P 500 and Nasdaq stock market indices during the crisis. The results show that the proposed models provide accurate risk measures according to the Basel Committee and make better use of the available information.

Keywords: Extreme value theory; Value at Risk; Subprime crisis; German stock market (search for similar items in EconPapers)
JEL-codes: C01 C22 C58 E44 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:29:y:2014:i:c:p:218-238

DOI: 10.1016/j.najef.2014.06.013

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