Extreme Value Theory versus traditional GARCH approaches applied to financial data: a comparative evaluation

Although stock prices fluctuate, the variations are relatively small and are frequently assumed to be normally distributed on a large time scale. But sometimes these fluctuations can become determinant, especially when unforeseen large drops in asset prices are observed that could result in huge losses or even in market crashes. The evidence shows that these events happen far more often than would be expected under the generalised assumption of normally distributed financial returns. Thus it is crucial to model distribution tails properly so as to be able to predict the frequency and magnitude of extreme stock price returns. In this paper we follow the approach suggested by McNeil and Frey in 2000 and combine GARCH-type models with the extreme value theory to estimate the tails of three financial index returns ¿ S&P 500, FTSE 100 and NIKKEI 225 ¿ representing three important financial areas in the world. Our results indicate that EVT-based conditional quantile estimates are more accurate than those from conventional GARCH models assuming normal or Student¿s t distribution innovations when doing not only in-sample but also out-of-sample estimation. Moreover, these results are robust to alternative GARCH model specifications. The findings of this paper should be useful to investors in general, since their goal is to be able to forecast unforeseen price movements and take advantage of them by positioning themselves in the market according to these predictions

Derivatives, the shape of international capital flows and the virtues of prudential regulation

Includes bibliograph

A composite leading indicator of the inflation cycle for the Euro area

We evaluate the performance of composite leading indicators of turning points of inflation in the Euro area, constructed by combining the techniques of Fourier analysis and Kalman filters with the National Bureau of Economic Research methodology. In addition, the study compares the empirical performance of Euro Simple Sum and Divisia monetary aggregates and provides a tentative answer to the issue of whether or not the UK should join the Euro area. Our findings suggest that, first, the cyclical pattern of the different composite leading indicators very closely reflect that of the inflation cycle for the Euro area; second, the empirical performance of the Euro Divisia is better than its Simple Sum counterpart and third, the UK is better out of the Euro area.

Market efficiency and the Euro: the case of the Athens stock exchange

Non-linearity, Market efficiency, Random walk, GARCH, Non-linear error correction, C22, C52, G10,