On Value-at-Risk and the more extreme : A study on quantitative market risk measurements

Abstract: Inline with the third pillar of the Basel accords, quantitative market risk measurements are investigate and evaluated comparing JP Morgan’s RiskMetrics and Bollerslev’s GARCH with the Peek over Threshold and Block Maxima approaches from the Extreme Value Theory framework. Value-at-Risk and Expected Shortfall (Conditional Value-at-Risk), with 95% and 99% confidence, is predicted for 25 years of the OMXS30. The study finds Bollerslev’s suggested t distribution to be a more appropriate distributional assumption, but no evidence to prefer the GARCH to the RiskMetrics. The more demanding Extreme Value Theory procedures trail behind as they are found wasteful of data and more difficult to backtest and therefore evaluate.