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Journal articles (2005), Journal of Banking and Finance, pp. 1017

The Choice of the Distribution of Asset Returns: How Extreme Value Theory Can Help?

One of the issues of risk management is the choice of the distribution of asset returns. Academics and practitioners have assumed for a long time that the distribution of asset returns is a Gaussian distribution. Such an assumption has been used in many field of finance: building optimal portfolio, pricing and hedging derivatives and managing risks. However, real financial data tend to exhibit extreme price changes such as stock market crashes that seem incompatible with the assumption of normality. This article shows how extreme value theory can be useful to know more precisely the characteristics of the distribution of asset returns and finally help to chose a better model by focusing on the tails of the distribution.

LONGIN, F. (2005). The Choice of the Distribution of Asset Returns: How Extreme Value Theory Can Help? Journal of Banking and Finance, pp. 1017.