Extreme Value Theory for Finance: A Survey

74 Pages Posted: 5 Feb 2012

Date Written: February 3, 2012

Abstract

Extreme value theory is concerned with the study of the asymptotical distribution of extreme events, that is to say events which are rare in frequency and huge with respect to the majority of observations. Statistical methods derived from this theory have been increasingly employed in finance, especially in the context of risk measurement. The aim of the present study is twofold. The first part delivers a critical review of the theoretical underpinnings of extreme value theory. The second part provides a survey of some major applications of extreme value theory to finance, namely its use to test different distributional assumptions for the data, Value-at-Risk and Expected Shortfall calculations, asset allocation under safety-first type constraints and the study of contagion and dependence across markets under stress conditions.

Keywords: extreme value theory, risk management, fat-tailed distributions, Value-at-Risk, systemic risk, asset allocation

JEL Classification: C10, C16, G10, G20, G21

Suggested Citation

Rocco, Marco, Extreme Value Theory for Finance: A Survey (February 3, 2012). Bank of Italy Occasional Paper No. 99, Available at SSRN: https://ssrn.com/abstract=1998740 or http://dx.doi.org/10.2139/ssrn.1998740

Marco Rocco (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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