 Extreme Value Theory and Value at RiskRevista de Analisis Economico – Economic Analysis Review, 2003, vol. 18, issue 1, 57-85 Abstract: Value at Risk (VaR) is a measure of the maximum potential change in value of a portfolio of financial assets with a given probability over a given time horizon. VaR became a key measure of market risk since the Basle Committee stated that banks should be able to cover losses on their trading portfolios over a ten-day horizon, 99 percent of the time. A common practice is to compute VaR by assuming that changes in value of the portfolio are normally distributed, conditional on past information. However, assets returns usually come from fat-tailed distributions. Therefore, computing VaR under the assumption of conditional normality can be an important source of error. We illustrate this point with Chilean and U.S. returns series by resorting to extreme value theory (EVT) and GARCH-type models. In addition, we show that dynamic estimation of empirical quantiles can also give more accurate VaR estimates than quantiles of a standard normal. Keywords: risk; VAR; GARCH (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ila:anaeco:v:18:y:2003:i:1:p:57-85 Ordering information: This journal article can be ordered from Access Statistics for this article Revista de Analisis Economico – Economic Analysis Review is currently edited by Carlos Ponce More articles in Revista de Analisis Economico – Economic Analysis Review from Universidad Alberto Hurtado/School of Economics and Business Contact information at EDIRC. |
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