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The purpose of this paper is to use the extreme value theory to analyze ten Asian stock markets, identifying which type of extreme value asymptotic distribution better fits historical extreme market events. Understanding the influence of extreme market events is of great importance for risk managers. Our empirical tests indicate that the return distributions are not characterized by normality and that the minima and the maxima of the return series may be satisfactorily modeled within an extreme value framework. The average waiting time for an index to present a daily return below/above a specific threshold is generally larger for Asian major markets than for Asian emerging markets. We also compute VaR estimates using extreme value theory and compare the results with the empirical and normal VaR estimates. The results suggest that the extreme value method of estimating VaR is a more conservative approach to determining capital requirements than traditional methods.
This paper studies stock market returns in twelve countries with a special focus on Asian stocks and the Asian crisis. Under the turbulent conditions in 1997 and 1998, our approach is a conservative and cautious one. Specifically, we construct an international portfolio using a shortfall constraint approach designed to minimise the quot;probability of lossquot;. We also use the tail index based on the Extreme Value Theory to analyse the distribution of extreme returns particularly those included in the left tail. The approach adopted here represents one of the recent developments in finance that explicitly accepts a departure from the long tradition of Normal distribution assumption, and it corresponds directly with the recent trend in the finance industry in emphasising the value-at-risk approach for risk management.We find, despite the great turmoil during the Asian crisis, that Asian stocks remain viable investment opportunities to the US investors. An ex ante optimal portfolio constructed using a simplistic method and based on information available in the previous month, outperformed, in every aspect, a portfolio consists of only US stocks. With more sophisticated techniques for forecasting returns and risk, and with the Asian economies on course to a full recovery, this result can only be stronger. Other findings in this paper include a positive relationship between correlation and volatility and a negative relationship between correlation and returns. During stock markets downturn, both correlation and volatility are likely to go up eroding some of the benefits of international diversification.
Recent evidence in the U.S. and Europe indicates that stocks with high maximum daily returns in the previous month, perform poorly in the current month. We investigate the presence of a similar effect in the emerging Chinese stock markets with portfolio-level analysis and firm-level Fama-MacBeth cross-sectional regressions. We find evidence of a MAX effect similar to the U.S. and European markets though the effect appears stronger for longer holding periods. Contrary to U.S. and European evidence, the MAX effect in China does not weaken much less reverse the anomalous IV effect. Both the MAX and IV effects appear to independently coexist in the Chinese stock markets. Interpreted together with the strong evidence of risk-seeking behaviour among Chinese investors, our results are consistent with the suggestion that the negative MAX effect is driven by investor preference for stocks with lottery-like features.
Extreme price movements associated with tail returns are catastrophic for all investors and it is necessary to make accurate predictions of the severity of these events. Choosing a time frame associated with large financial booms and crises this paper investigates the tail behaviour of Asian equity market returns and quantifies two risk measures, quantiles and average losses, along with their associated average waiting periods. Extreme value theory using the Peaks over Threshold method generates the risk measures where tail returns are modelled with a fat-tailed Generalised Pareto Distribution. We find that lower tail risk measures are more severe than upper tail realisations at the lowest probability levels. Moreover, the Kuala Lumpar Composite exhibits the largest risk measures.
A copula approach is used to examine the extreme return-volume relationship in six emerging East-Asian equity markets. The empirical results indicate that there is significant and asymmetric return-volume dependence at extremes for these markets. In particular, extremely high returns (large gains) tend to be associated with extremely large trading volumes, but extremely low returns (big losses) tend not to be related to either large or small volumes.
This second issue for 2004 contains 8 new papers, including notable contributions from: Nancy Brune, Geoffrey Garrett, and Bruce Kogut on the global spread of privatization; and Mark P. Taylor and Elena T. Branson on asymmetric arbitrage and default premiums in the U.S. and Russian markets. Other papers in the issue look at German wage structures, contagion in equity markets, export orientation and productivity in Sub-Saharan Africa, the role of higher vs. basic education in economic development, and issues related to capital account liberalization.