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Downside Risk for European Equity Markets

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  • Cotter, John

Abstract

This paper applies extreme value theory to measure downside risk for European equity markets. Two related measures, value at risk and the excess loss probability estimator provide a coherent approach to optimally protect investor wealth opportunities for low quantile and probability combinations. The fat-tailed characteristic of equity index returns is captured by explicitly modelling tail returns only. The paper finds the DAX100 is the most volatile index, and this generally becomes more pronounced as one moves to lower quantile and probability estimates.

Suggested Citation

  • Cotter, John, 2004. "Downside Risk for European Equity Markets," MPRA Paper 3537, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:3537
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    References listed on IDEAS

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    1. Francis X. Diebold & Til Schuermann & John D. Stroughair, 2000. "Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 1(2), pages 30-35, January.
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    3. Cotter, John, 2001. "Margin exceedences for European stock index futures using extreme value theory," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1475-1502, August.
    4. Jon Danielsson & Casper G. De Vries, 2000. "Value-at-Risk and Extreme Returns," Annals of Economics and Statistics, GENES, issue 60, pages 239-270.
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    11. repec:adr:anecst:y:2000:i:60:p:10 is not listed on IDEAS
    12. Subu Venkataraman, 1997. "Value at risk for a mixture of normal distributions: the use of quasi- Bayesian estimation techniques," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 21(Mar), pages 2-13.
    13. Jansen, Dennis W. & Koedijk, Kees G. & de Vries, Casper G., 2000. "Portfolio selection with limited downside risk," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 247-269, November.
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    Cited by:

    1. Saša ŽIKOVIÆ & Randall K. FILER, 2013. "Ranking of VaR and ES Models: Performance in Developed and Emerging Markets," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(4), pages 327-359, August.
    2. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
    3. Sarafrazi, Soodabeh & Hammoudeh, Shawkat & AraújoSantos, Paulo, 2014. "Downside risk, portfolio diversification and the financial crisis in the euro-zone," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 368-396.
    4. Cotter, John, 2006. "Modelling catastrophic risk in international equity markets: An extreme value approach," MPRA Paper 3507, University Library of Munich, Germany.
    5. Cotter, John, 2004. "Modelling extreme financial returns of global equity markets," MPRA Paper 3532, University Library of Munich, Germany.
    6. Liu, Tengdong & Hammoudeh, Shawkat & Santos, Paulo Araújo, 2014. "Downside risk and portfolio diversification in the euro-zone equity markets with special consideration of the crisis period," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 47-68.
    7. John Cotter, 2005. "Extreme risk in futures contracts," Applied Economics Letters, Taylor & Francis Journals, vol. 12(8), pages 489-492.
    8. Sasa Zikovic & Randall Filer, 2009. "Hybrid Historical Simulation VaR and ES: Performance in Developed and Emerging Markets," CESifo Working Paper Series 2820, CESifo.
    9. Chen-Yu Chen & Jian-Hsin Chou & Hung-Gay Fung & Yiuman Tse, 2017. "Setting the futures margin with price limits: the case for single-stock futures," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 219-237, January.
    10. Dar-Hsin Chen & Chun-Da Chen & Jianguo Chen, 2009. "Downside risk measures and equity returns in the NYSE," Applied Economics, Taylor & Francis Journals, vol. 41(8), pages 1055-1070.
    11. Alex YiHou Huang, 2009. "A value-at-risk approach with kernel estimator," Applied Financial Economics, Taylor & Francis Journals, vol. 19(5), pages 379-395.
    12. Julija Cerović & Vesna Karadžić, 2015. "Extreme Value Theory In Emerging Markets: Evidence From Montenegrin Stock Exchange," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 60(206), pages 87-116, July - Se.

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    More about this item

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G1 - Financial Economics - - General Financial Markets

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