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Risks 2014, 2(2), 211-225; doi:10.3390/risks2020211

When the U.S. Stock Market Becomes Extreme?

Department of Finance, DRM-Finance, Université de Paris-Dauphine, Place du Maréchal de Lattre de Tassigny, 75775 Paris CEDEX 16, France
Received: 5 March 2014 / Revised: 5 May 2014 / Accepted: 13 May 2014 / Published: 28 May 2014
(This article belongs to the Special Issue Risk Management Techniques for Catastrophic and Heavy-Tailed Risks)
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Abstract

Over the last three decades, the world economy has been facing stock market crashes, currency crisis, the dot-com and real estate bubble burst, credit crunch and banking panics. As a response, extreme value theory (EVT) provides a set of ready-made approaches to risk management analysis. However, EVT is usually applied to standardized returns to offer more reliable results, but remains difficult to interpret in the real world. This paper proposes a quantile regression to transform standardized returns into theoretical raw returns making them economically interpretable. An empirical test is carried out on the S&P500 stock index from 1950 to 2013. The main results indicate that the U.S stock market becomes extreme from a price variation of ±1.5% and the largest one-day decline of the 2007–2008 period is likely, on average, to be exceeded one every 27 years.
Keywords: extreme value theory; volatility; risk management extreme value theory; volatility; risk management
This is an open access article distributed under the Creative Commons Attribution License (CC BY 3.0).

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Aboura, S. When the U.S. Stock Market Becomes Extreme? Risks 2014, 2, 211-225.

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