CentER Discussion Paper Series No. 2004-125
13 Pages Posted: 5 Jan 2005
Date Written: December 2004
In the sixties Mandelbrot already showed that extreme price swings are more likely than some of us think or incorporate in our models. A modern toolbox for analyzing such rare events can be found in the field of extreme value theory. At the core of extreme value theory lies the modelling of maxima over large blocks of observations and of excesses over high thresholds. The general validity of these models makes them suitable for out-of-sample extrapolation. By way of illustration we assess the likeliness of the crash of the Dow Jones on October 19, 1987, a loss that was more than twice as large as on any other single day from 1954 until 2004.
Keywords: exceedances, extreme value theory, heavy tails, maxima
JEL Classification: C13,C14
Suggested Citation: Suggested Citation