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Predictive Performance of Conditional Extreme Value Theory and Conventional Methods in Value at Risk Estimation

Ghorbel, Ahmed and Trabelsi, Abdelwahed (2007): Predictive Performance of Conditional Extreme Value Theory and Conventional Methods in Value at Risk Estimation.

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Abstract

This paper conducts a comparative evaluation of the predictive performance of various Value at Risk (VaR) models such as GARCH-normal, GARCH-t, EGARCH, TGARCH models, variance-covariance method, historical simulation and filtred Historical Simulation, EVT and conditional EVT methods. Special emphasis is paid on two methodologies related to the Extreme Value Theory (EVT): The Peaks over Threshold (POT) and the Block Maxima (BM). Both estimation techniques are based on limits results for the excess distribution over high thresholds and block maxima, respectively. 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 Tunisian stock exchange (BVMT) and CAC 40 indexes with the intension to compare the performance of various estimation methods on markets with different capitalization and trading practices. The sample extends over the period July 29, 1994 to December 30, 2005. We use a rolling windows of approximately four years (n= 1000 days). The sub-period from July, 1998 for BVMT (from August 4, 1998 for CAC 40) has been reserved for backtesting purposes. 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.

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