Asymmetric Exceedance-Time Model: An Optimal Threshold Approach Based on Extreme Value Theory

Abstract

We propose an innovative asymmetric exceedance-time model with optimal thresholds. This model examines the impact of extreme downside and upside shocks and determines how the duration between past and present extreme shocks affects the dependent variable. We use extreme value theory (peak-over-threshold method) to model extremes, proposing a procedure for the automatic computation of optimal thresholds, at the point where the fitting of the extreme value distribution is maximized. We apply our model to S&P 500 equity index and GBP/USD exchange rate data and show that a strong statistical relation coincides with optimal threshold levels.

Keywords: Asymmetric Exceedance-Time Model, Extreme Value Theory, Temporal Variability of Extremes

JEL Classification: C41, C58, G01