Estimation of the probable maximum loss based on extreme value theory for stock returns
DOI:
https://doi.org/10.12775/EQUIL.2009.005Abstract
Probable maximum loss is a measure coming from the insurance market, where is applied to insurance portfolio analysis. This correspond to the 20-80 rule, which states that 20% of the individual claims are responsible for more than 80% of the total claim amount in a well defined portfolio. The main aim of the presented paper is estimation of the probable maximum loss for stock returns which are treated as portfolios of securities. It turns out that probable maximum loss is a useful tool for risk analysis or/and diagnostic purposes at capital markets, but we have to be aware of its drawbacks.
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References
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Beirlant J., Matthys G., Extreme quantile estimation for heavy-tailed distributions, August, 2001, //www.gloriamundi.org/detailpopup.asp?ID=453055854, (01.02.2007)
Cebrian A.C., Denuit M., Lambert P., Generalized Pareto fit to the society of actuaries? large claims database, North American Actuarial J., (3), 18-36, 2003
Embrechts P., Klüppelberg C., Mikosach T., Modelling Extremal Events for Insurance and Finance, Springer, Berlin, 2003
Fisher R.A., Tippet L.H.C., Limiting Forms fo the Frequency Distribution of the Largest or Smallest Member of a Sample, Proc. Cambridge Phil. Soc., 24(2), s. 163-190, 1928
McNeil J.A., Calculating quantile risk measures for financial time series using extreme value theory, Preprint, ETH, Zurych, 1998
McNeil J.A., Frey F. Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach, Journal of Empirical Finance, Vol. 7, 271?300, 2000
Pickands J., Statistical Inference Using Extreme Order Statistics, Annals of Statistics, Vol. 3, No 1, 119-131, 1975
Wilkinson M.E, Estimating probable maximum loss with order statistics, Proceedings of the Casualty Actuarial Society, 195-209, 1982
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Published
2009-06-30
How to Cite
Fałdziński, M. (2009). Estimation of the probable maximum loss based on extreme value theory for stock returns. Equilibrium. Quarterly Journal of Economics and Economic Policy, 2(1), 51–59. https://doi.org/10.12775/EQUIL.2009.005
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Section
Applications of dynamic econometrics
