TWO-COMPONENT EXTREME VALUE DISTRIBUTION FOR ASIA-PACIFIC STOCK INDEX RETURNS

Thierry Ané ()
Additional contact information
Thierry Ané: IESEG School of Management, 3 rue de la Diague, 59800 Lille, France

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 05, 643-671

Abstract: Financial risk management typically deals with low-probability events in the tails of asset return distributions. To better capture the behavior of these tails, several studies have clearly highlighted that one should rely on a methodology that directly focuses on the tails of the distribution rather than getting the tails as an outcome of modelling the entire density function. Traditional Extreme Value Theory (EVT) distributions, however, provide a good fit for the bulk of the extreme data but usually underestimate a small amount of observations considered as "outliers".Since the main objective of risk management analysis is to estimate the size and probability of very large price movements, these "outliers" are by definition the very events we need to investigate. In this paper we suggest the use of a Two-Component Extreme Value (TCEV) distribution where a 'basic distribution' generates ordinary extremes (more frequent and less severe in the mean) while an "outlying distribution" generates rarer but severe extremes.Goodness-of-fit tests show the superiority of this distribution to capture the extremes of eleven MSCI Indices of the Pacific-Basin region relative to traditional EVT densities. Measures of accuracy and efficiency used to assess the performance of VaR forecasts also indicate that the additional flexibility brought by the TCEV model provides strong improvements for risk management.

Keywords: Extreme value; mixture of distributions; Value-at-Risk (search for similar items in EconPapers)
Date: 2006
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024906003792
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:09:y:2006:i:05:n:s0219024906003792

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024906003792

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().