Crisis, Value at Risk, and Conditional Extreme Value Theory via Garch-Jump Model

Ze-To, S. 2010. Crisis, Value at Risk, and Conditional Extreme Value Theory via Garch-Jump Model. Review of Futures Markets. 18 (4), pp. 319-345.

TitleCrisis, Value at Risk, and Conditional Extreme Value Theory via Garch-Jump Model
TypeJournal article
AuthorsZe-To, S.
Abstract

This study develops a new conditional extreme value theory-based model (EVT) combined with the GARCH-Jump model to forecast extreme risks. This paper utilizes the GARCH-Jump model to asymmetrically feed back the past realization of jump innovation to the future volatility of the return distribution and uses the EVT to model the tail distribution of the GARCH-Jump-processed residuals. The model is compared to the GARCH-t model and the conditional EVT-GARCH model to evaluate its performance in estimating extreme losses
in three major market crashes and crises. The results show that the conditional EVT-GARCH-Jump model outperforms the GARCH and GARCH-t models in depicting the non-normality and in providing accurate VaR forecasts in the in-sample and out-sample tests. The EVT-GARCH-Jump model, which can measure the volatility of extreme price movement in capital markets due to unexpected events, enhances the EVT-based model for measuring the tail risk.

Keywordsvalue-at-risk
extreme value theory
JournalReview of Futures Markets
Journal citation18 (4), pp. 319-345
ISSN0898-011X
Year2010
PublisherChicago Board of Trade
Publication dates
Published2010

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