An Extreme Value Approach to Estimating Volatility and Value at Risk

Turan G. Bali
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Turan G. Bali: Baruch College

The Journal of Business, 2003, vol. 76, issue 1, 83-108

Abstract: This article determines the type of asymptotic distribution for the extreme changes in U.S. Treasury yields. The thin-tailed Gumbel and exponential distributions are strongly rejected against the fat-tailed Frechet and Pareto distributions. The empirical results indicate that the volatility of maximal and minimal changes in interest rates declines as time-to-maturity rises, yielding a downward-sloping volatility curve for the extremes. The article proposes an extreme value approach to estimating value at risk and shows that the statistical theory of extremes provides a more accurate approach for risk management and value at risk (VaR) calculations than the standard models.

Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:76:y:2003:i:1:p:83-108

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