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Tail risk in the Chinese stock market: An AEV model on the maximal drawdowns

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  • Feng, Yun
  • Hou, Weijie
  • Song, Yuping

Abstract

This paper proposes a novel autoregressive extreme value (AEV) framework with covariates to capture the time-dependent dynamics of financial tail risk. Using the intra-day maxima of 5-minute potential drawdowns for CSI300 in the Chinese stock market, the study estimates an AEV(1,1) model with the effects of the foreign exchange market, interest rate market, and commodity futures market. The empirical results suggest that the commodity futures market plays a role in driving the maximal drawdown. Moreover, the tail index of AEV sensitively captures the clustering of tail behaviors in the Chinese stock market. Finally, the backtesting evidence further demonstrates that AEV exhibits satisfactory forecasting performance for Value-at-Risk in the Chinese stock market.

Suggested Citation

  • Feng, Yun & Hou, Weijie & Song, Yuping, 2023. "Tail risk in the Chinese stock market: An AEV model on the maximal drawdowns," Finance Research Letters, Elsevier, vol. 58(PA).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006669
    DOI: 10.1016/j.frl.2023.104294
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    More about this item

    Keywords

    Maximal drawdowns; Forecasting; Stock market; Value-at-risk;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • J17 - Labor and Demographic Economics - - Demographic Economics - - - Value of Life; Foregone Income

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