Mandelbrot's Extremism

CentER Discussion Paper Series No. 2004-125

13 Pages Posted: 5 Jan 2005

See all articles by Jan Beirlant

Jan Beirlant

Catholic University of Leuven (KUL)

Wim Schoutens

KU Leuven - Department of Mathematics

Johan Segers

Catholic University of Louvain (UCL)

Date Written: December 2004

Abstract

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

Beirlant, Jan and Schoutens, Wim and Segers, Johan, Mandelbrot's Extremism (December 2004). CentER Discussion Paper Series No. 2004-125. Available at SSRN: https://ssrn.com/abstract=642405 or http://dx.doi.org/10.2139/ssrn.642405

Jan Beirlant (Contact Author)

Catholic University of Leuven (KUL) ( email )

W. de Croylaan 54
Leuven, B-3001
Belgium

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Johan Segers

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium
+32 10 474311 (Phone)
+32 10 473032 (Fax)

HOME PAGE: http://www.uclouvain.be/stat

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