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An Application of Extreme Value Theory for Measuring Financial Risk in BRICS Economies

An Application of Extreme Value Theory for Measuring Financial Risk in BRICS Economies
An Application of Extreme Value Theory for Measuring Financial Risk in BRICS Economies
Characterization and quantification of the tail behaviour of rare events is an important issue in financial risk management. In this paper, the extreme behaviour of stock market returns from BRICS over the period 1995–2015 is described using five parametric distributions based on extreme value theory, including two mixture distributions based on the student’s t distribution. The distributions are fitted to the data using the method of maximum likelihood. The generalized extreme value (GEV) distribution is found to give the best fit. Based on the GEV distribution, estimates of value at risk, VaRp(X) and expected shortfall, ESp(X) from the five countries are computed. In addition, the correlation structure and tail dependence of these markets are characterized using several copula models. The Gumbel copula gives the best fit with evidence of significant relationships for all the pairs of the markets. To account for the possibility that due to sampling variability, a different model might be selected as the preferred model in a new sample from the same population, a short bootstrapping exercise was performed.
2198-5804
Afuecheta, Emmanuel
947cc127-d327-46e5-badd-3c11ed9a87cb
Utazi, Chigozie Edson
97af8901-3d52-46c5-8d16-e68e29057aa6
Ranganai, Edmore
6b9a5533-2aa4-4934-a574-1205f831ec51
Nnanatu, Chibuzor Christopher
24be7c1b-a677-4086-91b4-a9d9b1efa5a3
Afuecheta, Emmanuel
947cc127-d327-46e5-badd-3c11ed9a87cb
Utazi, Chigozie Edson
97af8901-3d52-46c5-8d16-e68e29057aa6
Ranganai, Edmore
6b9a5533-2aa4-4934-a574-1205f831ec51
Nnanatu, Chibuzor Christopher
24be7c1b-a677-4086-91b4-a9d9b1efa5a3

Afuecheta, Emmanuel, Utazi, Chigozie Edson, Ranganai, Edmore and Nnanatu, Chibuzor Christopher (2020) An Application of Extreme Value Theory for Measuring Financial Risk in BRICS Economies. Annals of Data Science. (doi:10.1007/s40745-020-00294-w).

Record type: Article

Abstract

Characterization and quantification of the tail behaviour of rare events is an important issue in financial risk management. In this paper, the extreme behaviour of stock market returns from BRICS over the period 1995–2015 is described using five parametric distributions based on extreme value theory, including two mixture distributions based on the student’s t distribution. The distributions are fitted to the data using the method of maximum likelihood. The generalized extreme value (GEV) distribution is found to give the best fit. Based on the GEV distribution, estimates of value at risk, VaRp(X) and expected shortfall, ESp(X) from the five countries are computed. In addition, the correlation structure and tail dependence of these markets are characterized using several copula models. The Gumbel copula gives the best fit with evidence of significant relationships for all the pairs of the markets. To account for the possibility that due to sampling variability, a different model might be selected as the preferred model in a new sample from the same population, a short bootstrapping exercise was performed.

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Published date: 22 June 2020
Additional Information: © 2020, Springer-Verlag GmbH Germany

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Local EPrints ID: 458053
URI: http://eprints.soton.ac.uk/id/eprint/458053
ISSN: 2198-5804
PURE UUID: fd61d5b8-8196-4c46-9fe3-128c4c4d7ba6

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Date deposited: 27 Jun 2022 17:09
Last modified: 27 Jun 2022 17:09

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Contributors

Author: Emmanuel Afuecheta
Author: Chigozie Edson Utazi
Author: Edmore Ranganai
Author: Chibuzor Christopher Nnanatu

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