Multivariate Extremes, Aggregation and Risk Estimation

35 Pages Posted: 27 Dec 2000

See all articles by Hoskuldur Ari Hauksson

Hoskuldur Ari Hauksson

RWE Trading UK Ltd

Michel M. Dacorogna

DEAR-Consulting

Thomas Domenig

Zurcher Kantonalbank

Ulrich A. Müller

Olsen & Associates

Gennady Samorodnitsky

Cornell University

Multiple version iconThere are 2 versions of this paper

Date Written: November 24, 2000

Abstract

We briefly introduce some basic facts about multivariate extreme value theory and present some new results regarding finite aggregates and multivariate extreme value distributions. Based on our results high frequency data can considerably improve quality of estimates of extreme movements in financial markets.

Secondly we present an empirical exploration of what the tails really look like for four foreign exchange rates sampled at varying frequencies. Both temporal and spatial dependence is considered. In particular we estimate the spectral measure, which along with the tail index, completely determines the extreme value distribution.

Lastly we apply our results to the problem of portfolio optimization or risk minimization. We analyze how the expected shortfall and VaR scale with time horizon and find that this scaling is not by a factor of square root of time as is frequently used, but by a different power of time. We show that the accuracy of risk estimation can be drastically improved by using hourly or bihourly data.

JEL Classification: C14, F31, G11

Suggested Citation

Hauksson, Hoskuldur Ari and Dacorogna, Michel M. and Domenig, Thomas and Müller, Ulrich A. and Samorodnitsky, Gennady, Multivariate Extremes, Aggregation and Risk Estimation (November 24, 2000). Available at SSRN: https://ssrn.com/abstract=254392 or http://dx.doi.org/10.2139/ssrn.254392

Hoskuldur Ari Hauksson

RWE Trading UK Ltd ( email )

130 Wood Street
London EC2V 6DL
United Kingdom

Michel M. Dacorogna

DEAR-Consulting ( email )

Scheuchzerstrasse 160
Zurich, 8057
Switzerland
+41795447327 (Phone)

Thomas Domenig

Zurcher Kantonalbank ( email )

Zinsresearch
Zurich 8000
Switzerland

Ulrich A. Müller (Contact Author)

Olsen & Associates ( email )

Seefeldstrasse 233
CH-8008 Zurich
Switzerland
+41 (1) 386 48 16 (Phone)
+41 (1) 422 22 82 (Fax)

Gennady Samorodnitsky

Cornell University ( email )

School of Operations Research and Industrial Engineering; Department of Statistical Science
Ithaca, NY 14853
United States

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