Tail risk in the Chinese stock market: An AEV model on the maximal drawdowns

Yun Feng, Weijie Hou and Yuping Song

Finance Research Letters, 2023, vol. 58, issue PA

Abstract: This paper proposes a novel autoregressive extreme value (AEV) framework with covariates to capture the time-dependent dynamics of financial tail risk. Using the intra-day maxima of 5-minute potential drawdowns for CSI300 in the Chinese stock market, the study estimates an AEV(1,1) model with the effects of the foreign exchange market, interest rate market, and commodity futures market. The empirical results suggest that the commodity futures market plays a role in driving the maximal drawdown. Moreover, the tail index of AEV sensitively captures the clustering of tail behaviors in the Chinese stock market. Finally, the backtesting evidence further demonstrates that AEV exhibits satisfactory forecasting performance for Value-at-Risk in the Chinese stock market.

Keywords: Maximal drawdowns; Forecasting; Stock market; Value-at-risk (search for similar items in EconPapers)
JEL-codes: C22 C53 J17 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006669

DOI: 10.1016/j.frl.2023.104294

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