Extreme Events in Finance

Chapter 21EVT Seen by a Vet: A Practitioner's Experience on Extreme Value Theory

Jean-François Boulier

Aviva Investors, London, United Kingdom

21.1 What has the vet done?

I joined the financial industry in March 1987 with a quant background in engineering and scientific research experience in fluid mechanics. Six months later, the S&P 500 plunged 18% in what has come to be known as Black Monday and have seen long-term interest rate swings of more than 3% in a few days. The following year, I presented an empirical study on the French stock market daily movements – which crashed by an equivalent albeit lesser magnitude (15%) – at the French Finance Association (AFFI) conference, at a time when the stock market had more than rebounded. The French market index crashed by an equivalent albeit lesser magnitude (15%) on the same Black Monday. Sticking to the Gaussian distribution for the stock index variation leads to a roughly 15 standard deviation event, thus a highly unlikely event with an average waiting time period (1/probability) far exceeding the age of the universe … Our universe! This forced me into looking at other more realistic probability distributions.

We all experienced in the following decade a gold rush in quantitative finance stimulated by liberalization of markets, by access to technology and data, as well as by strong interactions between academics and practitioners. As an active member of the European Institute of Quantitative Investment Research, I had access ...