Filtered extreme‐value theory for value‐at‐risk estimation: evidence from Turkey

Abstract

Purpose

The purpose of this paper is to use filtered extreme‐value theory (EVT) model to forecast one of the main emerging market stock returns and compare the predictive performance of this model with other conditional volatility models.

Design/methodology/approach

This paper employs eight filtered EVT models created with conditional quantile to estimate value‐at‐risk (VaR) for the Istanbul Stock Exchange. The performances of the filtered EVT models are compared to those of generalized autoregressive conditional heteroskedasticity (GARCH), GARCH with student‐t distribution, GARCH with skewed student‐t distribution, and FIGARCH by using alternative back‐testing algorithms, namely, Kupiec test, Christoffersen test, Lopez test, Diebold and Mariano test, root mean squared error (RMSE), and h‐step ahead forecasting RMSE.

Findings

The results indicate that filtered EVT performs better in terms of capturing fat‐tails in stock returns than parametric VaR models. An increase in the conditional quantile decreases h‐step ahead number of exceptions and this shows that filtered EVT with higher conditional quantile such as 40 days should be used for forward looking forecasting.

Originality/value

The research results show that emerging market stock return should be forecasted with filtered EVT and conditional quantile days lag length should also be estimated based on forecasting performance.

Citation

Ozun, A., Cifter, A. and Yılmazer, S. (2010), "Filtered extreme‐value theory for value‐at‐risk estimation: evidence from Turkey", Journal of Risk Finance, Vol. 11 No. 2, pp. 164-179. https://doi.org/10.1108/15265941011025189

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