Managing Portfolio Risk Using Multivariate Extreme Value Methods

33 Pages Posted: 6 Feb 2013

See all articles by Sawsan Abbas

Sawsan Abbas

University of Bahrain

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester; Alan Turing Institute

Jonathan Tawn

Lancaster University - Mathematics and Statistics

Date Written: February 5, 2013

Abstract

This paper provides a strategy for portfolio risk management by inferring extreme movements in financial markets. The core of the provided strategy is a statistical model for the joint tail distribution that attempts to capture accurately the data generating process through an extremal modelling for the univariate margins and the multivariate dependence structure. It takes into account the asymmetric behavior of extreme negative and positive returns, the heterogeneous temporal and cross-sectional lead-lag extremal dependencies among the portfolio constituents. The strategy facilitates scenario generation for future returns, estimation of portfolio profit-and-loss distribution and calculation of risk measures, and hence, enabling us to answer several questions of economic interest. We illustrate the usefulness of our proposal by an application to stock market returns for the G5 economies.

Keywords: ARMA-GARCH filtering, Asymptotic dependence, Asymptotic independence, Copula, Multivariate extreme values

JEL Classification: C14, C15, C32

Suggested Citation

Abbas, Sawsan and Poon, Ser-Huang and Tawn, Jonathan, Managing Portfolio Risk Using Multivariate Extreme Value Methods (February 5, 2013). Available at SSRN: https://ssrn.com/abstract=2212420 or http://dx.doi.org/10.2139/ssrn.2212420

Sawsan Abbas

University of Bahrain ( email )

P.O Box 32038
Sukhair Campus, 32038
Bahrain

Ser-Huang Poon (Contact Author)

Alliance Manchester Business School, University of Manchester ( email )

Alliance Manchester Business School
Booth Street West
Manchester, Manchester M15 6PB
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

Alan Turing Institute ( email )

British Library, 96 Euston Road
96 Euston Road
London, NW12DB
United Kingdom

Jonathan Tawn

Lancaster University - Mathematics and Statistics ( email )

Department of Mathematics and Statistics
Lancaster University
Lancaster, LA1 4YF
United Kingdom
+44 1524 59 3965 (Phone)
+44 1524 59 2681 (Fax)

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