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An Automatic Procedure for the Estimation of the Tail Index

Ricardo Gimeno

Bank of Spain

Clara I. Gonzalez

Foundation for Applied Economic Research (FEDEA)

March 2012

MPRA Paper No. 37023

Extreme Value Theory is increasingly used in the modelling of financial time series. The non-normality of stock returns leads to the search for alternative distributions that allows skewness and leptokurtic behavior. One of the most used distributions is the Pareto Distribution because it allows non-normal behaviour, which requires the estimation of a tail index.

This paper provides a new method for estimating the tail index. We propose an automatic procedure based on the computation of successive nor- mality tests over the whole of the distribution in order to estimate a Gaussian Distribution for the central returns and two Pareto distributions for the tails. We find that the method proposed is an automatic procedure that can be computed without need of an external agent to take the decision, so it is clearly objective.

Number of Pages in PDF File: 24

Keywords: Tail Index, Hill estimator, Normality Test

JEL Classification: C10, C15, G19

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Date posted: March 9, 2012  

Suggested Citation

Gimeno, Ricardo and Gonzalez, Clara I., An Automatic Procedure for the Estimation of the Tail Index (March 2012). MPRA Paper No. 37023. Available at SSRN: https://ssrn.com/abstract=2018824 or http://dx.doi.org/10.2139/ssrn.2018824

Contact Information

Ricardo Gimeno
Bank of Spain ( email )
Madrid 28014
Clara I. Gonzalez (Contact Author)
Foundation for Applied Economic Research (FEDEA) ( email )
Madrid 28001
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