Risk Analysis via Generalized Pareto Distributions

Yi He, Liang Peng, Dabao Zhang and Zifeng Zhao

Journal of Business & Economic Statistics, 2022, vol. 40, issue 2, 852-867

Abstract: We compute the value-at-risk of financial losses by fitting a generalized Pareto distribution to exceedances over a threshold. Following the common practice of setting the threshold as high sample quantiles, we show that, for both independent observations and time-series data, the asymptotic variance for the maximum likelihood estimation depends on the choice of threshold, unlike the existing study of using a divergent threshold. We also propose a random weighted bootstrap method for the interval estimation of VaR, with critical values computed by the empirical distribution of the absolute differences between the bootstrapped estimators and the maximum likelihood estimator. While our asymptotic results unify the inference with nondivergent and divergent thresholds, the finite sample studies via simulation and application to real data show that the derived confidence intervals well cover the true VaR in insurance and finance.

Date: 2022
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DOI: 10.1080/07350015.2021.1874390

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