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Extreme value theory for finance: a survey

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  • Marco Rocco

    (Banca d'Italia)

Abstract

Extreme value theory is concerned with the study of the asymptotical distribution of extreme events, that is to say events which are rare in frequency and huge with respect to the majority of observations. Statistical methods derived from this theory have been increasingly employed in finance, especially in the context of risk measurement. The aim of the present study is twofold. The first part delivers a critical review of the theoretical underpinnings of extreme value theory. The second part provides a survey of some major applications of extreme value theory to finance, namely its use to test different distributional assumptions for the data, Value-at-Risk and Expected Shortfall calculations, asset allocation under safety-first type constraints and the study of contagion and dependence across markets under stress conditions.

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  • Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_99_11
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    More about this item

    Keywords

    extreme value theory; risk management; fat-tailed distributions; Value-at-Risk; systemic risk; asset allocation;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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