Title: Predictive performance of conditional Extreme Value Theory in Value-at-Risk estimation

Authors: Ahmed Ghorbel, Abdelwahed Trabelsi

Addresses: Institut Superieur de Gestion, Laboratoire BESTMOD, Universite de Tunis, 41, Avenue de la Liberte, le Bardo 2000, Tunis, Tunisie. ' Institut Superieur de Gestion, Laboratoire BESTMOD, Universite de Tunis, 41, Avenue de la Liberte, le Bardo 2000, Tunis, Tunisie

Abstract: This paper conducts a comparative evaluation of the predictive performance of various Value-at-Risk (VaR) models. Special emphasis is paid to two methodologies related to the Extreme Value Theory (EVT): The Peaks Over Threshold (POT) and the Block Maxima (BM). We apply both unconditional and conditional EVT models to management of extreme market risks in stock markets. They are applied on daily returns of the BVMT and CAC 40 indices with the intention to compare the performance of various estimation methods on markets with different capitalisation and trading practices. The results we report demonstrate that conditional POT EVT method produces the most accurate forecasts of extreme losses both for standard and more extreme VaR quantiles. The conditional block maxima EVT method is less accurate.

Keywords: financial risk management; value-at-risk; VaR estimation; extreme value theory; EVT; conditional EVT; backtesting; peaks over threshold; block maxima; market risks; stock markets; extreme losses; forecasting.

DOI: 10.1504/IJMEF.2008.019218

International Journal of Monetary Economics and Finance, 2008 Vol.1 No.2, pp.121 - 148

Published online: 02 Jul 2008 *

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