Generating Extreme Value Distributions in Finance using Generative Adversarial Networks

Abstract: This thesis aims to develop a new model for stress-testing financial portfolios using Extreme Value Theory (EVT) and General Adversarial Networks (GANs). The current practice of risk management relies on mathematical or historical models, such as Value-at-Risk and expected shortfall. The problem with historical models is that the data which is available for very extreme events is limited, and therefore we need a method to interpolate and extrapolate beyond the available range. EVT is a statistical framework that analyzes extreme events in a distribution and allows such interpolation and extrapolation, and GANs are machine-learning techniques that generate synthetic data. The combination of these two areas can generate more realistic stress-testing scenarios to help financial institutions manage potential risks better. The goal of this thesis is to develop a new model that can handle complex dependencies and high-dimensional inputs with different kinds of assets such as stocks, indices, currencies, and commodities and can be used in parallel with traditional risk measurements. The evtGAN algorithm shows promising results and is able to mimic actual distributions, and is also able to extrapolate data outside the available data range.