Estimating Extreme downside risk premium using Extreme Value Theory Approach

Subject Areas : Financial engineering

Maryam Davallou ¹ ( Assistant professor, PhD of Financial Management, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran )
Mahdiyeh Dashti ² ( Master Student of Financial Management, Shahid Beheshti University )

Received: 2017-04-30 Accepted : 2017-08-06 Published : 2017-12-22

Keywords: Extreme Value Theory, Extreme Downside Risk, Generalized Extreme Value Distribution,

Abstract :

Recent year’s financial crisis gives rise to pay attention to extreme losses. Investors suffer from extreme losses and since unusaull outcomes probability is not far, investors concern about extreme tail of return distribution. This paper is aimed to examin extreme downside risk (EDR) that is calculated by extreme value theory (EVT) which is designed to explain uncommon events. For this purpose, a sample composed of 243 listed firms in Tehran Stock Exchange is examined for 1384 to 1394. Portfolio study approach and Fama- McBeth (1973) regression are used to EDR pricing test. The results confirm EDR pricing and statistical significancy of extreme downside risk in TSE. This research shows that potential loss from extreme downside returns, EDR, is captured by asset pricing as a risk factor. Also, the effects of other risk measures including volatility, valu at risk and right tail mesure are stronger than EDR and if their effectes is controlled, EDR risk premium is no longer statistically significant.