Extreme Value Theory and Value at Risk : Application to Oil Market

Vêlayoudom Marimoutou (1) , Bechir Raggad (2) , Abdelwahed Trabelsi (2)

1 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille
2 BESTMOD - Business and Economic Statistics MODeling

Recent increases in energy prices, especially oil prices, have become a principal concern for consumers, corporations, and governments. Most analysts believe that oil price fluctuations have considerable consequences on economic activity. Oil markets have become relatively free, resulting in a high degree of oil-price volatility and generating radical changes to world energy and oil industries. As a result oil markets are naturally vulnerable to significant negative volatility. An example of such a case is the oil embargo crisis of 1973. In this newly created climate, protection against market risk has become a necessity. Value at Risk (VaR) measures risk exposure at a given probability level and is very important for risk management. Appealing aspects of Extreme Value Theory (EVT) have made convincing arguments for its use in managing energy price risks. In this paper, we apply both unconditional and conditional EVT models to forecast Value at Risk. These models are compared to the performances of other well-known modelling techniques, such as GARCH, historical simulation and Filtered Historical Simulation. Both conditional EVT and Filtered Historical Simulation procedures offer a major improvement over the parametric methods. Furthermore, GARCH(1, 1)-t model may provide equally good results, as well as the combining of the two procedures.

Mots clés: Filtered Historical Simulation; Extreme Value Theory; Value at Risk; oil price volatility; GARCH; Historical Simulation; Filtered Historical Simulation.

Domaines: Economies et finances

Vêlayoudom Marimoutou, Bechir Raggad, Abdelwahed Trabelsi. Extreme Value Theory and Value at Risk : Application to Oil Market. 2006. ⟨halshs-00410746⟩