Portfolio tail risk : a multivariate extreme value theory approach
Abstract: This paper develops a method for assessing portfolio tail risk based on extreme value theory. The technique applies separate estimations of univariate series and allows for closed-form expressions for Value at Risk and Expected Shortfall. Its forecasting ability is tested on a portfolio of U.S. stocks. The in-sample goodness-of-fit tests indicate that the proposed approach is better suited for portfolio risk modeling under extreme market movements than comparable multivariate parametric methods. Backtesting across multiple quantiles demonstrates that the model cannot be rejected at any reasonable level of significance, even when periods of stress are included. Numerical simulations corroborate the empirical results.
engleski
2020
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Creative Commons CC BY 4.0 - Creative Commons Autorstvo 4.0 International License.
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Keywords: tail risk; extreme value theory; principal component analysis; value at risk; expected shortfall