Application of extreme value theory (EVT) to the measurement of risk and asset allocation
Abstract
This paper is an attempt to understand the application of Extreme value theory to risk management. We attempt to model extreme stock market returns (the NIFTY stock index in particular) as a Generalized Pareto Distribution. We use this distribution to estimate a parametric VAR with various confidence intervals for a daily time period. We then compare this value with a historical simulation VAR.
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