Financial Tail Risks and the Shapes of the Extreme Value Distribution: A Comparison between Conventional and Sharia-Compliant Stock Indexes

John Weirstrass Muteba Mwamba, Shawkat Hammoudeh and Rangan Gupta

No 201480, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper makes use of two types of extreme value distributions, namely: the generalised extreme value distribution often referred to as the block of maxima method (BMM), and the peak-over-threshold method (POT) of the extreme value distributions, to model the financial tail risks associated with the empirical daily log-return distributions of the sharia-compliant stock index and three regional conventional stock markets from 01/01/1998 to 16/09/2014. These include the Dow Jones Islamic market (DJIM), the U.S. S&P 500, the S&P Europe (SPEU), and the Asian S&P (SPAS50) indexes. Using the maximum likelihood (ML) method and the bootstrap simulations to estimate the parameters of these extreme value distributions, we find a significant difference in the tail risk behaviour between the Islamic and the conventional stock markets. We find that the Islamic market index exhibits fat tail behaviour in its right tail with high likelihood of windfall profit during extreme market conditions probably due to the ban on short selling strategies in Islamic finance. However, the conventional stock markets are found to be more risky than the Islamic markets, and exhibit fatter tail behaviour in both left and right tails. Our findings suggest that during extreme market conditions, short selling strategies lead to larger financial losses in the right tail than in the left tails.

Keywords: Tail risks; extreme value distributions; expected shortfall; BMM and POT; value at risk (search for similar items in EconPapers)
JEL-codes: G1 G13 G14 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2014-12
New Economics Papers: this item is included in nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (1)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:pre:wpaper:201480

Access Statistics for this paper

More papers in Working Papers from University of Pretoria, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Rangan Gupta ().