Modelling the Right-Tail Conditional Expectation and Variance of Various Philippine Stocks Return using the Class of Beta Generalized Pareto Distribution

Year: 2021       Vol.: 70       No.: 1      

Authors: Angelo E. Marasigan

Abstract:

A risk measure such as the value-at-risk (VaR) is commonly used by financial institution for capital management and calculation of amount of risk exposure against a loss. The incoherence of VaR leads to the calculation of conditional tail expectation (CTE) for remedy. In this study, formulas for the CTE and the conditional tail variance (CTV) under the class of beta generalized Pareto (bgP) distribution were derived. bgP is used to model the distribution of different scenarios of return of various Philippine stock indices using maximum likelihood estimation due to simulated annealing method with R software, and further used to compute the CTE and CTV of the data of returns according to the specified model. To determine the performance of bgP to model financial data sets, a comparison with its generating distributions which are the (generalized) beta and Pareto models were done. Finally, the method of historical simulation was also done and used to compute the corresponding VaR, CTE, and CTV for comparison to the above method of calculations.

Keywords: risk measure, Beta generalized Pareto distribution, value-atrisk, conditional tail expectation, conditional tail variance, heavy-tailed

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