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Extreme Value Analysis of Daily Canadian Crude Oil Prices

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Abstract

Crude oil markets are highly volatile and risky. Extreme value theory (EVT), an approach to modelling and measuring risks under rare events, has seen a more prominent role in risk management in recent years. This paper presents an application of EVT to the daily returns of crude oil prices in the Canadian spot market between 1998 and 2006. We focus on the peak over threshold method by analyzing the generalized Pareto-distributed exceedances over some high threshold. This method provides an effective means for estimating tail risk measures such as Value-at-Risk and Expected Shortfall. The estimates of risk measures computed under different high quantile levels exhibit strong stability across a range of the selected thresholds. At the 99th quantile, the estimates of VaR are approximately 6.3% and 6.8% for daily positive and negative returns, respectively.

Suggested Citation

  • Feng Ren & David E. Giles, 2007. "Extreme Value Analysis of Daily Canadian Crude Oil Prices," Econometrics Working Papers 0708, Department of Economics, University of Victoria.
    • Handle: RePEc:vic:vicewp:0708
    Note: ISSN 1485-6441
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    1. Manfred Gilli & Evis këllezi, 2006. "An Application of Extreme Value Theory for Measuring Financial Risk," Computational Economics, Springer;Society for Computational Economics, vol. 27(2), pages 207-228, May.
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    4. McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
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    7. McNeil, Alexander J., 1997. "Estimating the Tails of Loss Severity Distributions Using Extreme Value Theory," ASTIN Bulletin, Cambridge University Press, vol. 27(1), pages 117-137, May.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Modelling Extremes
      by Dave Giles in Econometrics Beat: Dave Giles' Blog on 2012-04-16 23:29:00

    Citations

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    Cited by:

    1. David E. Giles & Qinlu Chen, 2014. "Risk Analysis for Three Precious Metals: An Application of Extreme Value Theory," Econometrics Working Papers 1402, Department of Economics, University of Victoria.
    2. Karmakar, Madhusudan & Shukla, Girja K., 2015. "Managing extreme risk in some major stock markets: An extreme value approach," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 1-25.
    3. Miguel Carvalho & António Rua, 2014. "Extremal Dependence in International Output Growth: Tales from the Tails," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(4), pages 605-620, August.
    4. Ra l De Jes s Guti rrez & Lidia E. Carvajal Guti rrez & Oswaldo Garcia Salgado, 2023. "Value at Risk and Expected Shortfall Estimation for Mexico s Isthmus Crude Oil Using Long-Memory GARCH-EVT Combined Approaches," International Journal of Energy Economics and Policy, Econjournals, vol. 13(4), pages 467-480, July.
    5. He, Angela W.W. & Kwok, Jerry T.K. & Wan, Alan T.K., 2010. "An empirical model of daily highs and lows of West Texas Intermediate crude oil prices," Energy Economics, Elsevier, vol. 32(6), pages 1499-1506, November.
    6. Halkos, George & Tsirivis, Apostolos, 2019. "Using Value-at-Risk for effective energy portfolio risk management," MPRA Paper 91674, University Library of Munich, Germany.
    7. David E. Giles & Hui Feng & Ryan T. Godwin, 2016. "Bias-corrected maximum likelihood estimation of the parameters of the generalized Pareto distribution," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 45(8), pages 2465-2483, April.
    8. Herrera, Rodrigo, 2013. "Energy risk management through self-exciting marked point process," Energy Economics, Elsevier, vol. 38(C), pages 64-76.
    9. Wei Yang & Ai Han & Yongmiao Hong & Shouyang Wang, 2016. "Analysis of crisis impact on crude oil prices: a new approach with interval time series modelling," Quantitative Finance, Taylor & Francis Journals, vol. 16(12), pages 1917-1928, December.
    10. Knowledge Chinhamu & Chun-Kai Huang & Chun-Sung Huang & Jahvaid Hammujuddy, 2015. "Empirical Analyses of Extreme Value Models for the South African Mining Index," South African Journal of Economics, Economic Society of South Africa, vol. 83(1), pages 41-55, March.
    11. Halkos, George E. & Tsirivis, Apostolos S., 2019. "Value-at-risk methodologies for effective energy portfolio risk management," Economic Analysis and Policy, Elsevier, vol. 62(C), pages 197-212.
    12. Abdul-Aziz Ibn Musah & Jianguo Du & Hira Salah Ud din Khan & Alhassan Alolo Abdul-Rasheed Akeji, 2018. "The Asymptotic Decision Scenarios of an Emerging Stock Exchange Market: Extreme Value Theory and Artificial Neural Network," Risks, MDPI, vol. 6(4), pages 1-24, November.

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    More about this item

    Keywords

    Crude oil; daily returns; market volatility; extreme value analysis;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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