A comparison of extreme value theory approaches for….pdfVIP

NOTICE: this is the author’s version of a work that was accepted for publication in the Journal of Empirical Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in the Journal of Empirical Finance, 12.2 (2005), DOI: 10.1016/j.jempfin.2004.01.004 2 A Comparison of Extreme Value Theory Approaches for Determining Value at Risk by C. Brooks, A. D. Clare, J.W. Dalle Molle and G. Persand December 2003 Abstract This paper compares a number of different extreme value models for determining the value at risk of three LIFFE futures contracts. A semi-nonparametric approach is also proposed where the tail events are modeled using the Generalised Pareto Distribution and normal market conditions are captured by the empirical distribution function. The value at risk estimates from this approach are compared with those of standard nonparametric extreme value tail estimation approaches, with a small sample bias-corrected extreme value approach, and with those calculated from bootstrapping the unconditional density and bootstrapping from a GARCH(1,1) model. The results indicate that for a hold-out sample, the proposed semi-nonparametric extreme value approach yields superior results to other methods, but the small sample tail in