Please use this identifier to cite or link to this item: http://ktisis.cut.ac.cy/handle/10488/1179
Title: Risk measurement performance of alternative distribution functions
Authors: Bali, Turan G. 
Theodossiou, Panayiotis 
Category: Economics and Business
Field: Social Sciences
Issue Date: 2008
Publisher: The American Risk and Insurance Association
Source: Journal of Risk and Insurance. Volume 75 Issue 2, Pages 411 - 437
Abstract: This paper evaluates the performance of three extreme value distributions, i.e., generalized Pareto distribution (GPD), generalized extreme value distribution (GEV), and Box-Cox-GEV, and four skewed fat-tailed distributions, i.e., skewed generalized error distribution (SGED), skewed generalized t (SGT), exponential generalized beta of the second kind (EGB2), and inverse hyperbolic sign (IHS) in estimating conditional and unconditional value at risk (VaR) thresholds. The results provide strong evidence that the SGT, EGB2, and IHS distributions perform as well as the more specialized extreme value distributions in modeling the tail behavior of portfolio returns. All three distributions produce similar VaR thresholds and perform better than the SGED and the normal distribution in approximating the extreme tails of the return distribution. The conditional coverage and the out-of-sample performance tests show that the actual VaR thresholds are time varying to a degree not captured by unconditional VaR measures. In light of the fact that VaR type measures are employed in many different types of financial and insurance applications including the determination of capital requirements, capital reserves, the setting of insurance deductibles, the setting of reinsurance cedance levels, as well as the estimation of expected claims and expected losses, these results are important to financial managers, actuaries, and insurance practitioners.
URI: http://ktisis.cut.ac.cy/handle/10488/1179
DOI: 10.1111/j.1539-6975.2008.00266.x
Rights: © 2009 The American Risk and Insurance Association
Type: Article
Appears in Collections:Άρθρα/Articles

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