Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach

Alexander McNeil, Rüdiger Frey

Publikation: Wissenschaftliche FachzeitschriftOriginalbeitrag in FachzeitschriftBegutachtung


We propose a method for estimating Value at Risk (VaR) and related risk measures describing the tail of the conditional distribution of a heteroscedastic financial return series. Our approach combines pseudo-maximum-likelihood fitting of GARCH models to estimate the current volatility and extreme value theory (EVT) for estimating the tail of the innovation distribution of the GARCH model. We use our method to estimate conditional quantiles (VaR) and conditional expected shortfalls (the expected size of a return exceeding VaR), this being an alternative measure of tail risk with better theoretical properties than the quantile. Using backtesting of historical daily return series we show that our procedure gives better 1-day estimates than methods which ignore the heavy tails of the innovations or the stochastic nature of the volatility. With the help of our fitted models we adopt a Monte Carlo approach to estimating the conditional quantiles of returns over multiple-day horizons and find that this outperforms the simple square-root-of-time scaling method
Seiten (von - bis)271 - 300
FachzeitschriftJournal of Empirical Finance
PublikationsstatusVeröffentlicht - 2000