Crude oil futures tail risk measurement based on extreme value theory

Chunjiao Gao

International Journal of Global Energy Issues, 2023, vol. 45, issue 1, 53-65

Abstract: In this paper, we use three common tail risk measurements of Value-at-Risk (VaR), Expected Shortfall (ES) and Spectral Risk Measure (SRM) to calculate the tail risk of crude oil futures based on extreme value theory. Specifically, we propose a method to determine the optimal threshold in the extreme value theory, and further to calculate the values of VaR, ES and SRM based on Peak Over Threshold (POT) model. Empirical results show that the extreme value POT model can be used to characterise the tail risk of the price return under extreme fluctuations in Brent crude oil futures market. Moreover, the risk of VaR, ES and SRM in the Brent crude oil futures market based on extreme value theory is higher than that under the normal distribution assumption, which indicates that the traditional normal distribution assumption underestimates the tail risk. Owing the flexibility and the accuracy, we suggest that investors use ERM to measure the extreme risk of crude oil futures.

Keywords: spectral risk measurement; hyperbolic risk spectral function; extreme value theory; tail risk. (search for similar items in EconPapers)
Date: 2023
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