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Extreme Events in Finance

A Handbook of Extreme Value Theory and its Applications
Wiley Handbooks in Financial Engineering and Econometrics 1. Aufl.

von: Francois Longin
132,99 €
Verlag:	Wiley
Format:	PDF
Veröffentl.:	21.09.2016
ISBN/EAN:	9781118650332
Sprache:	englisch
Anzahl Seiten:	640

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Titelbeschreibung

A guide to the growing importance of extreme value risk theory, methods, and applications in the financial sector Presenting a uniquely accessible guide, Extreme Events in Finance: A Handbook of Extreme Value Theory and Its Applications features a combination of the theory, methods, and applications of extreme value theory (EVT) in finance and a practical understanding of market behavior including both ordinary and extraordinary conditions. Beginning with a fascinating history of EVTs and financial modeling, the handbook introduces the historical implications that resulted in the applications and then clearly examines the fundamental results of EVT in finance. After dealing with these theoretical results, the handbook focuses on the EVT methods critical for data analysis. Finally, the handbook features the practical applications and techniques and how these can be implemented in financial markets. Extreme Events in Finance: A Handbook of Extreme Value Theory and Its Applications includes: <ul> <li>Over 40 contributions from international experts in the areas of finance, statistics, economics, business, insurance, and risk management</li> <li>Topical discussions on univariate and multivariate case extremes as well as regulation in financial markets</li> <li>Extensive references in order to provide readers with resources for further study</li> <li>Discussions on using R packages to compute the value of risk and related quantities</li> </ul> The book is a valuable reference for practitioners in financial markets such as financial institutions, investment funds, and corporate treasuries, financial engineers, quantitative analysts, regulators, risk managers, large-scale consultancy groups, and insurers. Extreme Events in Finance: A Handbook of Extreme Value Theory and Its Applications is also a useful textbook for postgraduate courses on the methodology of EVTs in finance.

Inhaltsverzeichnis

About the Editor xiii About the Contributors xv 1 Introduction 1 François Longin 1.1 Extremes 1 1.2 History 2 1.3 Extreme value theory 2 1.4 Statistical estimation of extremes 2 1.5 Applications in finance 4 1.6 Practitioners’ points of view 6 1.7 A broader view on modeling extremes 6 1.8 Final words 7 1.9 Thank you note 7 References 8 2 Extremes Under Dependence—Historical Development and Parallels with Central Limit Theory 11 M.R. Leadbetter 2.1 Introduction 11 2.2 Classical (I.I.D.) central limit and extreme value theories 12 2.3 Exceedances of levels, kth largest values 14 2.4 CLT and EVT for stationary sequences, bernstein’s blocks, and strong mixing 15 2.5 Weak distributional mixing for EVT, D(un), extremal index 18 2.6 Point process of level exceedances 19 2.7 Continuous parameter extremes 20 References 22 3 The Extreme Value Problem in Finance: Comparing the Pragmatic Program with the Mandelbrot Program 25 Christian Walter 3.1 The extreme value puzzle in financial modeling 25 3.2 The sato classification and the two programs 28 3.3 Mandelbrot’s program: A fractal approach 34 3.4 The Pragmatic Program: A data-driven approach 39 3.5 Conclusion 47 Acknowledgments 48 References 48 4 Extreme Value Theory: An Introductory Overview 53 Isabel Fraga Alves and Cláudia Neves 4.1 Introduction 53 4.2 Univariate case 56 4.3 Multivariate case: Some highlights 84 Further reading 90 Acknowledgments 90 References 90 5 Estimation of the Extreme Value Index 97 Beirlant J., Herrmann K., and Teugels J.L. 5.1 Introduction 97 5.2 The main limit theorem behind extreme value theory 98 5.3 Characterizations of the max-domains of attraction and extreme value index estimators 99 5.4 Consistency and asymptotic normality of the estimators 103 5.5 Second-order reduced-bias estimation 104 5.6 Case study 106 5.7 Other topics and comments 108 References 111 6 Bootstrap Methods in Statistics of Extremes 117 M. Ivette Gomes, Frederico Caeiro, Lígia Henriques-Rodrigues, and B.G. Manjunath 6.1 Introduction 117 6.2 A few details on EVT 119 6.3 The bootstrap methodology in statistics of univariate extremes 127 6.4 Applications to simulated data 133 6.5 Concluding remarks 133 Acknowledgments 135 References 135 7 Extreme Values Statistics for Markov Chains with Applications to Finance and Insurance 139 Patrice Bertail, Stéphan Clémençon, and Charles Tillier 7.1 Introduction 139 7.2 On the (pseudo) regenerative approach for markovian data 141 7.3 Preliminary results 151 7.4 Regeneration-based statistical methods for extremal events 154 7.5 The extremal index 156 7.6 The regeneration-based hill estimator 159 7.7 Applications to ruin theory and financial time series 161 7.8 An application to the CAC40 165 7.9 Conclusion 167 References 167 8 Lévy Processes and Extreme Value Theory 171 Olivier Le Courtois and Christian Walter 8.1 Introduction 171 8.2 Extreme value theory 173 8.3 Infinite divisibility and Lévy processes 178 8.4 Heavy-tailed Lévy processes 182 8.5 Semi-heavy-tailed Lévy processes 184 8.6 Lévy processes and extreme values 187 8.7 Conclusion 192 References 192 9 Statistics of Extremes: Challenges and Opportunities 195 M. de Carvalho 9.1 Introduction 195 9.2 Statistics of bivariate extremes 196 9.3 Models based on families of tilted measures 204 9.4 Miscellanea 209 References 211 10 Measures of Financial Risk 215 S.Y. Novak 10.1 Introduction 215 10.2 Traditional measures of risk 215 10.3 Risk estimation 218 10.4 “Technical analysis” of financial data 222 10.5 Dynamic risk measurement 226 10.6 Open problems and further research 234 10.7 Conclusion 235 Acknowledgment 235 References 235 11 On the Estimation of the Distribution of Aggregated Heavy-Tailed Risks: Application to Risk Measures 239 Marie Kratz 11.1 Introduction 239 11.2 A brief review of existing methods 245 11.3 New approaches: Mixed limit theorems 247 11.4 Application to risk measures and comparison 269 11.5 Conclusion 277 References 279 12 Estimation Methods for Value at Risk 283 Saralees Nadarajah and Stephen Chan 12.1 Introduction 283 12.2 General properties 289 12.3 Parametric methods 300 12.4 Nonparametric methods 326 12.5 Semiparametric methods 332 12.6 Computer software 344 12.7 Conclusions 347 Acknowledgment 347 References 347 13 Comparing Tail Risk and Systemic Risk Profiles for Different Types of U.S. Financial Institutions 357 Stefan Straetmans and Thanh Thi Huyen Dinh 13.1 Introduction 357 13.2 Tail risk and systemic risk indicators 361 13.3 Tail risk and systemic risk estimation 364 13.4 Empirical results 368 13.5 Conclusions 381 References 382 14 Extreme Value Theory and Credit Spreads 391 Wesley Phoa 14.1 Preliminaries 391 14.2 Tail behavior of credit markets 394 14.3 Some multivariate analysis 398 14.4 Approximating value at risk for credit portfolios 401 14.5 Other directions 403 References 404 15 Extreme Value Theory and Risk Management in Electricity Markets 405 Kam Fong Chan and Philip Gray 15.1 Introduction 405 15.2 Prior literature 407 15.3 Specification of VaR estimation approaches 409 15.4 Empirical analysis 413 15.5 Conclusion 422 Acknowledgment 423 References 423 16 Margin Setting and Extreme Value Theory 427 John Cotter and Kevin Dowd 16.1 Introduction 427 16.2 Margin setting 428 16.3 Theory and methods 430 16.4 Empirical results 434 16.5 Conclusions 439 Acknowledgment 440 References 440 17 The Sortino Ratio and Extreme Value Theory: An Application to Asset Allocation 443 G. Geoffrey Booth and John Paul Broussard 17.1 Introduction 443 17.2 Data definitions and description 446 17.3 Performance ratios and their estimations 451 17.4 Performance measurement results and implications 456 17.5 Concluding remarks 460 Acknowledgments 461 References 461 18 Portfolio Insurance: The Extreme Value Approach Applied to the CPPI Method 465 Philippe Bertrand and Jean-Luc Prigent 18.1 Introduction 465 18.2 The CPPI method 467 18.3 CPPI and quantile hedging 472 18.4 Conclusion 481 References 481 19 The Choice of the Distribution of Asset Returns: How Extreme Value Can Help? 483 François Longin 19.1 Introduction 483 19.2 Extreme value theory 485 19.3 Estimation of the tail index 488 19.4 Application of extreme value theory to discriminate among distributions of returns 490 19.5 Empirical results 493 19.6 Conclusion 501 References 501 20 Protecting Assets Under Non-Parametric Market Conditions 507 Jean-Marie Choffray and Charles Pahud de Mortanges 20.1 Investors’ “known knowns” 509 20.2 Investors’ “known unknowns” 512 20.3 Investors’ “unknown knowns” 515 20.4 Investors’ “unknown unknowns” 518 20.5 Synthesis 522 References 523 21 EVT Seen by a Vet: A Practitioner’s Experience on Extreme Value Theory 525 Jean-François Boulier 21.1 What has the vet done? 525 21.2 Why use EVT? 526 21.3 What EVT could additionally bring to the party? 528 21.4 A final thought 528 References 528 22 The Robotization of Financial Activities: A Cybernetic Perspective 529 Hubert Rodarie 22.1 An increasingly complex system 530 22.2 Human error 532 22.3 Concretely, what do we need to do to transform a company into a machine? 534 References 543 23 Two Tales of Liquidity Stress 545 Jacques Ninet 23.1 The french money market fund industry. How history has shaped a potentially vulnerable framework 546 23.2 The 1992–1995 forex crisis 547 23.3 Four mutations paving the way for another meltdown 549 23.4 The subprime crisis spillover. How some MMFs were forced to lock and some others not 551 23.5 Conclusion. What lessons can be drawn from these two tales? 552 Further Readings 553 24 Managing Operational Risk in the Banking Business – An Internal Auditor Point of View 555 Maxime Laot Further Reading 559 References 560 Annexes 560 25 Credo Ut Intelligam 563 Henri Bourguinat and Eric Briys 25.1 Introduction 563 25.2 “Anselmist” finance 563 25.3 Casino or dance hall? 565 25.4 Simple-minded diversification 566 25.5 Homo sapiens versus homo economicus 568 Acknowledgement 569 References 569 26 Bounded Rationalities, Routines, and Practical as well as Theoretical Blindness: On the Discrepancy Between Markets and Corporations 571 Laurent Bibard 26.1 Introduction: Expecting the unexpected 571 26.2 Markets and corporations: A structural and self-disruptive divergence of interests 572 26.3 Making a step back from a dream: On people expectations 574 26.4 How to disentangle people from a unilateral short-term orientation? 578 References 580 Name Index 583 Subject Index 593

Autorenportrait

François Longin, PhD, is Professor in the Department of Finance at ESSEC Business School, France. He has been working on the applications of extreme value theory to financial markets for many years, and his research has been applied by financial institutions in the risk management area including market, credit, and operational risks. His research works can be found in scientific journals such as The Journal of Finance. Dr. Longin is currently a financial consultant with expertise covering risk management for financial institutions and portfolio management for asset management firms.