A comparison of extreme value theory approaches for determining value at risk

• Published in: Journal of empirical finance 2005-03, Vol.12 (2), p.339-352
• Main Authors: Brooks, C., Clare, A.D., Dalle Molle, J.W., Persand, G.
• Format: Article
• Language: English
• Subjects: Bootstrap; Finance; GARCH models; Generalised Pareto Distribution; Parametric; Pareto efficiency; Regression analysis; Risk; Semi-nonparametric and small sample bias corrected tail index estimators; Value at risk (VaR); Value theory
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2004.01.004

This paper compares a number of different extreme value models for determining the value at risk (VaR) of three LIFFE futures contracts. A semi-nonparametric approach is also proposed, where the tail events are modeled using the generalised Pareto distribution, and normal market conditions are captured by the empirical distribution function. The value at risk estimates from this approach are compared with those of standard nonparametric extreme value tail estimation approaches, with a small sample bias-corrected extreme value approach, and with those calculated from bootstrapping the unconditional density and bootstrapping from a GARCH(1,1) model. The results indicate that, for a holdout sample, the proposed semi-nonparametric extreme value approach yields superior results to other methods, but the small sample tail index technique is also accurate.