Extreme Events in Finance

Chapter 1Introduction

François Longin

Department of Finance, ESSEC Business School, Paris, France

1.1 Extremes

When I started to study extreme events in finance just after the stock market crash of October 1987, academic studies considered such events as outliers. It meant that the data associated with extreme events in financial markets were considered as abnormal and were discarded in empirical works. A few decades later, I am more than happy to edit a collective book about extreme events in finance.

Over the past decades, extreme value theory (EVT) has shown that we are gaining a better understanding of the statistical behavior of extreme movements of financial asset prices. Moreover, the understanding of the behavior of the market during extreme events is also useful for understanding the whole behavior of the market, both under ordinary and extraordinary conditions. In other words, it is a mistake to separate extreme events from other events. In fact, this could be a universal truth touching many aspects of society including business, politics, and religion.

This book is a collective work: it gathers 25 chapters written by more than 40 contributors from all over the world. This book is diverse in terms of contributors: it includes academics and practitioners from banks, fund management firms, insurance companies, and central banks. This book is also open minded in terms of areas: while most of the chapters deal with EVT and its applications in finance and insurance, it ...