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Book chapters (2000), Extremes and Integrated Risk Management, Risk Books, pp. 125-148

From Value-at-risk to Stress-testing: the Extreme Value Approach

This paper presents extreme value theory and its application to the calculation of the value at risk of a position. This statistical theory allows a quantification of the behaviour of extreme price movements. Extreme movements are associated with both tremors-like market adjustments or corrections observed during ordinary periods, and also with earthquake-like stock market crashes or foreign exchange crises observed during extraordinary periods. The approach based on extreme price movements then reconcile the existing methods of calculation of value at risk in usual market conditions and the methods of stress testing focusing on financial crises.

LONGIN, F. (2000). From Value-at-risk to Stress-testing: the Extreme Value Approach. In: Extremes and Integrated Risk Management. 1st ed. Risk Books, pp. 125-148.