Rethinking Valuation and Pricing Models

28

Tail Risk Reduction Strategies

Lerby M. Ergun^∗ and Philip A. Stork^∗∗

^∗Duisenberg School of Finance and Erasmus University of Rotterdam

^∗∗VU University Amsterdam

Chapter Outline

28.1 Introduction

28.2 Data and Methodology

28.3 Empirical Results

28.3.1 Robustness test

28.3.2 Empirical tests on other markets

28.4 Conclusion

References

28.1 Introduction

This chapter combines two strands of literature: (i) The measurement of tail risk with extreme value theory (EVT) and (ii) the use of technical analysis or systematic trading rules. The first strand, on EVT, is gaining popularity rather quickly. We refer to Novak and Beirlant (2006) for a recent article on the use of EVT to predict the size of a stock market crash. They estimate value at risk ...