Assessing the importance of the choice threshold in quantifying market risk under the POT approach (EVT)

Sonia Benito (), Carmen López-Martín () and Ángeles Navarro Mª ()
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Sonia Benito: National Distance Education University (UNED)
Carmen López-Martín: National Distance Education University (UNED)
Ángeles Navarro Mª: National Distance Education University (UNED)

Risk Management, 2023, vol. 25, issue 1, No 6, 31 pages

Abstract: Abstract From a theoretical point of view, the selection of thresholds is a critical issue in the framework of the Peaks Over Threshold (POT) approach, which is why in the last decade numerous methodologies have been proposed for its selection. In this paper, we address this subject from an empirical point of view by assessing to what extent the selection of the threshold is decisive in quantifying the market risk. For measuring market risk, we use the Value at Risk (VaR) and the Expected Shortfall (ES) measures. The results obtained indicate that there is a large set of thresholds that provide similar Generalized Pareto Distribution (GPD) quantiles estimators and as a consequence similar market risk measures. Just only, for large thresholds, those corresponding to the 98th and 99th percentile of the GPD some differences are found. It means that the choice of threshold in the framework of the POT method may not be relevant in quantifying market risk when we use the VaR and ES measures for this task.

Keywords: Extreme value theory; Peaks over threshold; Value at risk; Expected shortfall; Generalized Pareto distribution (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1057/s41283-022-00106-w

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