A Comparison of EVT and Standard VaR Estimations

27 Pages Posted: 23 Feb 2011 Last revised: 7 Mar 2011

See all articles by Jaroslav Baran

Jaroslav Baran

European Stability Mechanism

Jiri Witzany

University of Economics in Prague

Date Written: February 23, 2011

Abstract

In this paper, Extreme value theory (EVT) is applied in estimating low quantiles of P/L distribution and the results are compared to common VaR methodologies. The fundamental theory behind EVT is built, and peaks-over-threshold method is used for modeling the tail of the distribution of losses with Generalized Pareto Distribution (GPD). The different VaR methods are then compared using backtesting procedures. Practical issues such as time varying volatility of returns, and multivariate time series (portfolio of financial instruments) are covered.

Keywords: Risk Measures, Value-at-Risk, Extreme Value Theory, GARCH Estimations, Expected Shortfall, Backtesting

JEL Classification: C10, C22, G10

Suggested Citation

Baran, Jaroslav and Witzany, Jiri, A Comparison of EVT and Standard VaR Estimations (February 23, 2011). Available at SSRN: https://ssrn.com/abstract=1768011 or http://dx.doi.org/10.2139/ssrn.1768011

Jaroslav Baran (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Jiri Witzany

University of Economics in Prague ( email )

Winston Churchilla Sq. 4
Prague 3, 130 67
Czech Republic

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