Extreme events in finance : a handbook of extreme value theory and its applications / edited by François Longin.

Format:

Book

Contributor:

Longin, François Michel, 1968- editor.

Series:

Wiley handbooks in financial engineering and econometrics

Language:

English

Subjects (All):

Finance--Mathematical models.

Finance.

Extreme value theory--Mathematical models.

Extreme value theory.

Mathematical models.

Physical Description:

xxxi, 601 pages ; 25 cm.

Place of Publication:

Hoboken, New Jersey : John Wiley & Sons, Inc., [2017]

Summary:

"A guide to the growing importance of extreme value risk theory, methods, and applications in the financial sector Presenting a uniquely accessible guide, Extreme Events in Finance: A Handbook of Extreme Value Theory and its Applications features a combination of the theory, methods, and applications of extreme value theory (EVT) in finance as well as a practical understanding of market behavior including both ordinary and extraordinary conditions.€ Beginning with a fascinating history of EVTs and financials modeling, the handbook introduces the historical implications that resulted in the applications and then clearly examines the fundamental results of EVT in finance. After dealing with these theoretical results, the handbook focuses on the EVT methods critical for data analysis. Finally, the handbook features the practical applications and techniques, and how these can be implemented in financial markets. Extreme Events in Finance: A Handbook of Extreme Value Theory and its Applications also includes: Over 40 contributions from international experts in the areas of finance, statistics, economics, business, insurance, and risk management Topical discussions on univariate and multivariate case extremes as well as regulation in financial markets€ Extensive references in order to provide readers with resources for further study Discussions on using R packages to compute the value of risk and related quantities€ The book is a valuable reference for practitioners in financial markets such as financial institutions, investment funds, and corporate treasuries, financial engineers, quantitative analysts, regulators, risk managers, large-scale consultancy groups, and insurers. Extreme Events in Finance: A Handbook of Extreme Value Theory and its Applications is also a useful textbook for postgraduate courses on the methodology of EVTs in finance"-- Provided by publisher.

"Extreme Events in Finance: A Handbook of Extreme Value Theory and its Applications features a combination of the theory, methods, and applications of extreme value theory (EVT) in finance as well as a practical understanding of market behavior including both ordinary and extraordinary conditions"-- Provided by publisher.

Contents:

1 Introduction / François Longin Longin, François 1

1.1 Extremes 1

1.2 History 2

1.3 Extreme value theory 2

1.4 Statistical estimation of extremes 2

1.5 Applications in finance 4

1.6 Practitioners' points of view 6

1.7 A broader view on modeling extremes 6

1.8 Final words 7

1.9 Thank you note 7

References 8

2 Extremes Under Dependence-Historical Development and Parallels with Central Limit Theory / M.R. Leadbetter Leadbetter, M.R. 11

2.1 Introduction 11

2.2 Classical (I.I.D.) central limit and extreme value theories 12

2.3 Exceedances of levels, kth largest values 14

2.4 CLT and EVT for stationary sequences, bernstein's blocks, and strong mixing 15

2.5 Weak distributional mixing for EVT, D(u_n), extremal index 18

2.6 Point process of level exceedances 19

2.7 Continuous parameter extremes 20

References 22

3 The Extreme Value Problem in Finance: Comparing the Pragmatic Program with the Mandelbrot Program / Christian Walter Walter, Christian 25

3.1 The extreme value puzzle in financial modeling 25

3.2 The sato classification and the two programs 28

3.3 Mandelbrot's program: A fractal approach 34

3.4 The Pragmatic Program: A data-driven approach 39

3.5 Conclusion 47

Acknowledgments 48

References 48

4 Extreme Value Theory: An Introductory Overview / Isabel Fraga Alves Alves, Isabel Fraga, Cláudia Neves Neves, Cláudia 53

4.1 Introduction 53

4.2 Univariate case 56

4.3 Multivariate case: Some highlights 84

Further reading 90

Acknowledgments 90

References 90

5 Estimation of the Extreme Value Index / Beirlant J. J., Beirlant, Herrmann K. K., Herrmann, Teugels J.L. J.L., Teugels 97

5.1 Introduction 97

5.2 The main limit theorem behind extreme value theory 98

5.3 Characterizations of the max-domains of attraction and extreme value index estimators 99

5.4 Consistency and asymptotic normality of the estimators 103

5.5 Second-order reduced-bias estimation 104

5.6 Case study 106

5.7 Other topics and comments 108

References 111

6 Bootstrap Methods in Statistics of Extremes / M. Ivette Gomes Gomes, M. Ivette, Frederico Caeiro Caeiro, Frederico, Lígia Henriques-Rodrigues Henriques-Rodrigues, Lígia, B.C. Manjunath Manjunath, B.C. 117

6.1 Introduction 117

6.2 A few details on EVT 119

6.3 The bootstrap methodology in statistics of univariate extremes 127

6.4 Applications to simulated data 133

6.5 Concluding remarks 133

Acknowledgments 135

References 135

7 Extreme Values Statistics for Markov Chains with Applications to Finance and Insurance / Patrice Bertail Bertail, Patrice, Stéphan Clémençon Clémençon, Stéphan, Charles Tillier Tillier, Charles 139

7.1 Introduction 139

7.2 On the (pseudo) regenerative approach for markovian data 141

7.3 Preliminary results 151

7.4 Regeneration-based statistical methods for extremal events 154

7.5 The extremal index 156

7.6 The regeneration-based hill estimator 159

7.7 Applications to ruin theory and financial time series 161

7.8 An application to the CAC40 165

7.9 Conclusion 167

References 167

8 Lévy Processes and Extreme Value Theory / Olivier Le Courtois Courtois, Olivier Le, Christian Walter Walter, Christian 171

8.1 Introduction 171

8.2 Extreme value theory 173

8.3 Infinite divisibility and Lévy processes 178

8.4 Heavy-tailed Lévy processes 182

8.5 Semi-heavy-tailed Lévy processes 184

8.6 Lévy processes and extreme values 187

8.7 Conclusion 192

References 192

9 Statistics of Extremes: Challenges and Opportunities / M. de Carvalho Carvalho, M. de 195

9.1 Introduction 195

9.2 Statistics of bivariate extremes 196

9.3 Models based on families of tilted measures 204

9.4 Miscellanea 209

References 211

10 Measures of Financial Risk / S.Y. Novak Novak, S.Y. 215

10.1 Introduction 215

10.2 Traditional measures of risk 215

10.3 Risk estimation 218

10.4 "Technical analysis" of financial data 222

10.5 Dynamic risk measurement 226

10.6 Open problems and further research 234

10.7 Conclusion 235

Acknowledgment 235

References 235

11 On the Estimation of the Distribution of Aggregated Heavy-Tailed Risks: Application to Risk Measures / Marie Kratz Kratz, Marie 239

11.1 Introduction 239

11.2 A brief review of existing methods 245

11.3 New approaches: Mixed limit theorems 247

11.4 Application to risk measures and comparison 269

11.5 Conclusion 277

References 279

12 Estimation Methods for Value at Risk / Saralees Nadarajah Nadarajah, Saralees, Stephen Chan Chan, Stephen 283

12.1 Introduction 283

12.2 General properties 289

12.3 Parametric methods 300

12.4 Nonparametric methods 326

12.5 Semiparametric methods 332

12.6 Computer software 344

12.7 Conclusions 347

Acknowledgment 347

References 347

13 Comparing Tail Risk and Systemic Risk Profiles for Different Types of U.S. Financial Institutions / Stefan Straetmans Straetmans, Stefan, Thanh Thi Huyen Dinh Dinh, Thanh Thi Huyen 357

13.1 Introduction 357

13.2 Tail risk and systemic risk indicators 361

13.3 Tail risk and systemic risk estimation 364

13.4 Empirical results 368

13.5 Conclusions 381

References 382

14 Extreme Value Theory and Credit Spreads / Wesley Phoa Phoa, Wesley 391

14.1 Preliminaries 391

14.2 Tail behavior of credit markets 394

14.3 Some multivariate analysis 398

14.4 Approximating value at risk for credit portfolios 401

14.5 Other directions 403

References 404

15 Extreme Value Theory and Risk Management in Electricity Markets / Kam Fong Chan Chan, Kam Fong, Philip Gray Gray, Philip 405

15.1 Introduction 405

15.2 Prior literature 407

153 Specification of VaR estimation approaches 409

15.4 Empirical analysis 413

15.5 Conclusion 422

Acknowledgment 423

References 423

16 Margin Setting and Extreme Value Theory / John Cotter Cotter, John, Kevin Dowd Dowd, Kevin 427

16.1 Introduction 427

16.2 Margin setting 428

16.3 Theory and methods 430

16.4 Empirical results 434

16.5 Conclusions 439

Acknowledgment 440

References 440

17 The Sortino Ratio and Extreme Value Theory: An Application to Asset Allocation / G. Geoffrey Booth Booth, G.

Geoffrey, John Paul Broussard Broussard, John Paul 443

17.1 Introduction 443

17.2 Data definitions and description 446

17.3 Performance ratios and their estimations 451

17.4 Performance measurement results and implications 456

17.5 Concluding remarks 460

Acknowledgments 461

References 461

18 Portfolio Insurance: The Extreme Value Approach Applied to the CPPI Method / Philippe Bertrand Bertrand, Philippe, Jean-Luc Prigent Prigent, Jean-Luc 465

18.1 Introduction 465

18.2 The CPPI method 467

18.3 CPPI and quantile hedging 472

18.4 Conclusion 481

References 481

19 The Choice of the Distribution of Asset Returns: How Extreme Value Can Help? / François Longin Longin, François 483

19.1 Introduction 483

19.2 Extreme value theory 485

19.3 Estimation of the tail index 488

19.4 Application of extreme value theory to discriminate among distributions of returns 490

19.5 Empirical results 493

19.6 Conclusion 501

References 501

20 Protecting Assets Under Non-Parametric Market Conditions / Jean-Marie Choffray Choffray, Jean-Marie, Charles Pahud de Mortanges Mortanges, Charles Pahud de 507

20.1 Investors' "known knowns" 509

20.2 Investors' "known unknowns" 512

20.3 Investors' "unknown knowns"' 515

20.4 Investors' "unknown unknowns" 518

20.5 Synthesis 522

References 523

21 EVT Seen by a Vet: A Practitioner's Experience on Extreme Value Theory / Jean-François Boulier Boulier, Jean-François 525

21.1 What has the vet done? 525

21.2 Why use EVT? 526

21.3 What EVT could additionally bring to the party? 528

21.4 A final thought 528

References 528

22 The Robotization of Financial Activities: A Cybernetic Perspective / Hubert Rodarie Rodarie, Hubert 529

22.1 An increasingly complex system 530

22.2 Human error 532

22.3 Concretely, what do we need to do to transform a company into a machine? 534

References 543

23 Two Tales of Liquidity Stress / Jacques Ninet Ninet, Jacques 545

23.1 The french money market fund industry. How history has shaped a potentially vulnerable framework 546

23.2 The 1992-1995 forex crisis 547

23.3 Four mutations paving the way for another meltdown 549

23.4 The subprime crisis spillover. How some MMFs were forced to lock and some others not 551

23.5 Conclusion. What lessons can be drawn from these two tales? 552

Further Readings 553

24 Managing Operational Risk in the Banking Business - An Internal Auditor Point of View / Maxime Laot Laot, Maxime 555

Further Reading 559

References 560

Annexes 560

25 Credo Ut Intelligam / Henri Bourguinat Bourguinat, Henri, Eric Briys Briys, Eric 563

25.1 Introduction 563

25.2 "Anselmist" finance 563

25.3 Casino or dance hall? 565

25.4 Simple-minded diversification 566

25.5 Homo sapiens versus homo economicus 568

Acknowledgement 569

References 569

26 Bounded Rationalities, Routines, and Practical as well as Theoretical Blindness: On the Discrepancy Between Markets and Corporations / Laurent Bibard Bibard, Laurent 571

26.1 Introduction: Expecting the unexpected 571

26.2 Markets and corporations: A structural and self-disruptive divergence of interests 572

26.3 Making a step back from a dream: On people expectations 574

26.4 How to disentangle people from a unilateral short-term orientation? 578

References 580.

Notes:

Includes bibliographical references and indexes.

ISBN:

9781118650196

1118650190

OCLC:

962813082