Modelling catastrophic risk in international equity markets: An extreme value approach

TL;DR

This paper applies the Block Maxima Extreme Value approach to international equity markets to quantify catastrophic risk, revealing that the Nikkei is more vulnerable to extreme downturns than other major indices.

Contribution

It introduces an extreme value methodology for risk measurement that accounts for diverging market risk levels, improving upon traditional absolute return measures.

Findings

Nikkei exhibits higher catastrophic risk than FTSE and Dow Jones.

Extreme value approach effectively captures tail risk in international markets.

Method provides a robust way to assess market vulnerability to extreme events.

Abstract

This letter uses the Block Maxima Extreme Value approach to quantify catastrophic risk in international equity markets. Risk measures are generated from a set threshold of the distribution of returns that avoids the pitfall of using absolute returns for markets exhibiting diverging levels of risk. From an application to leading markets, the letter finds that the Nikkei is more prone to catastrophic risk than the FTSE and Dow Jones Indexes.