Measuring Tail Thickness Under GARCH and an Application to Extreme Exchange Rate Changes
Terry A. Marsh
University of California, Berkeley - Department of Finance
September 1, 2003
Journal of Empirical Finance, Vol. 12, 2005
UC Berkeley IBER Finance Working Paper No. 297
Accurate modeling of extreme price changes is vital to financial risk management. We examine the small sample properties of adaptive tail index estimators under the class of student-t marginal distribution functions including GARCH and propose a model-based bias-corrected estimation approach. Our simulation results indicate that bias strongly relates to the underlying model and may be positively as well as negatively signed. The empirical study of daily exchange rate changes reveals substantial differences in measured tail-thickness due to small sample bias. As a consequence, high quantile estimation may lead to a substantial underestimation of tail risk.
Number of Pages in PDF File: 30
Keywords: fat tails, tail index, stationary marginal distribution, GARCH, Hill estimator, foreign exchange
JEL Classification: C13, C14, F31Accepted Paper Series
Date posted: January 22, 2003 ; Last revised: October 4, 2009
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 0.469 seconds