Measuring Financial Risks by Peak Over Threshold Method

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Assessing the probability of rare and extreme events is an important issue in the risk management of financial portfolios. Extreme value theory provides the solid fundamentals needed for the statistical modelling of such events and the computation of extreme risk measures. The focus of the paper is on the use of the peak over threshold method under extreme value theory to compute right tail risk measures using Value at Risk and Expected Shortfall and to understand how models perform in different economic situations by back-testing, applying it to the S&P 500 Index and one of the Index - Ford Motor Company. Both unconditional and conditional GARCH(1,1) models with zero or non-zero parametric

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