When the U.S. Stock Market Becomes Extreme?

Sofiane Aboura
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Sofiane Aboura: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: Over the last three decades, the world economy has been facing stock market crashes, currency crisis, the dot-com and real estate bubble burst, credit crunch and banking panics. As a response, extreme value theory (EVT) provides a set of ready-made approaches to risk management analysis. However, EVT is usually applied to standardized returns to offer more reliable results, but remains difficult to interpret in the real world. This paper proposes a quantile regression to transform standardized returns into theoretical raw returns making them economically interpretable. An empirical test is carried out on the S&P500 stock index from 1950 to 2013. The main results indicate that the U.S stock market becomes extreme from a price variation of 1.5% and the largest one-day decline of the 2007–2008 period is likely, on average, to be exceeded one every 27 years.

Keywords: Valeurs extrêmes; Théorie des; Volatilité (finances); Gestion du risque; Extreme value theory (EVT); Volatility; Risk management (search for similar items in EconPapers)
Date: 2014
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Published in Risks, 2014, 2 (2), pp.211-225. ⟨10.3390/risks2020211⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01531256

DOI: 10.3390/risks2020211

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