Assessing the importance of the choice threshold in quantifying market risk under the POT method (EVT)

Sonia Benito Muela and Ángeles Navarro Mª
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Sonia Benito Muela: Department of Economic Analysis Faculty of Economics and Business Administration National Distance Education University (UNED). Author-Name: Carmen López-Martín
Ángeles Navarro Mª: PhD. Student of the Faculty of Economics and Business Administration National Distance Education University (UNED).

No 2018-20, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: The conditional extreme value theory has been proven to be one of the most successful in estimating market risk. The implementation of this method in the framework of the Peaks Over Threshold (POT) model requires one to choose a threshold for fitting the generalized Pareto distribution (GPD). In this paper, we investigate whether the selection of the threshold is important for the quantification of market risk. For measuring risk, we use the value at risk (VaR) measure and the expected shortfall (ES) measure. The study has been done for a large set of assets. The results obtained indicate that the quantification of the market risk through the VaR and ES measures does not depend on the threshold selected. This result is also found in a smaller sample.

Keywords: Extreme Value Theory; Peaks over Threshold; Value at Risk; Expected Shortfall; Generalized Pareto Distribution. (search for similar items in EconPapers)
JEL-codes: G19 G29 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2018-09
New Economics Papers: this item is included in nep-rmg
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