Tail risk in emerging markets of Southeastern Europe

Selena Totić and Miloš Božović

Applied Economics, 2016, vol. 48, issue 19, 1785-1798

Abstract: This article examines the left-tail behaviour of returns on stocks in Southeastern Europe (SEE). We apply conditional extreme value theory (EVT) approach on daily returns of six stock market indices from SEE between 2004 and 2013. Predictive performance of value-at-risk (VaR) and expected shortfall (ES) based on EVT is compared against several alternatives, such as historical simulation and analytical approach based on GARCH with a single conditional distribution. Model backtesting with daily returns shows that EVT-based models provide more reliable VaR and ES forecasts than the alternative models in all six markets. Unlike the alternatives, the EVT-based models cannot be rejected as VaR confidence level is increased. This emphasizes the importance of extreme events in SEE markets and indicates that the ability of a model to capture volatility clustering accurately is not sufficient for a correct assessment of risk in these markets.

Date: 2016
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DOI: 10.1080/00036846.2015.1109037

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