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Measuring market risk using extreme value theory

Philippine Review of Economics

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Field Value
 
Title Measuring market risk using extreme value theory
 
Creator Suaiso, Jose Oliver Q.; University of the Philippines School of Statistics
Mapa, Dennis S.; University of the Philippines School of Statistics
 
Subject extreme value theory; peaks-over-threshold; value-at-risk; market risk; risk management
 
Description The adoption of Basel II standards by the Bangko Sentral ng Pilipinas initiates financial institutions to develop value-at-risk (VaR)models to measure market risk. In this paper, two VaR models are considered using the peaks-over-threshold (POT) approach of the extreme value theory (EVT): (1) static EVT model, which is the straightforward application of pot to the bond benchmark rates; and (2) dynamic evt model, which applies pot to the residuals of the fitted AR-GARCH model. The results are compared with traditional VaR methods such as RiskMetrics and AR-GARCH-type models. The relative size, accuracy, and efficiency of the models are assessed using mean relative bias, backtesting, likelihood ratio tests, loss function, mean relative scaled bias, and computation of market risk charge. Findings show that the dynamic EVT model can capture market risk conservatively, accurately, and efficiently. It is also practical to use because it has the potential to lower a bank’s capital requirements. Comparing the two EVT models, the dynamic model is better than static as the former can address some issues in risk measurement and effectively capture market risks.Classification-JEL: C01, C22, G12
 
Publisher Philippine Review of Economics
 
Contributor —
 
Date 2010-09-02
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://www.econ.upd.edu.ph/pre/index.php/pre/article/view/5
 
Source Philippine Review of Economics; Vol 46, No 2 (2009): Papers in Honor of Rolando A. Danao
1655-1516
 
Language eng
 
Relation http://www.econ.upd.edu.ph/pre/index.php/pre/article/view/5/670
 
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