Journal of Risk

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Modeling redemption risks of mutual funds using extreme value theory

Sascha Desmettre and Matthias Deege

  • Redemption risks of mutual funds can be modeled using the POT-approach from extreme value theory.
  • The redemption data should be used on a relative basis for the calculation of the resulting risk measure LaR.
  • The threshold parameter of a GPD is estimated via a fully automated procedure.
  • A backtesting analysis shows the validity and applicability of the POT-approach to fund redemption data. 

ABSTRACT

We show how redemption risks of mutual funds can be modeled using the peaks-over-threshold approach from extreme value theory. The resulting risk measure liquidity-at-risk is adapted to cover issues arising when fund redemption data from the real world is used, and we give guidelines for what should be considered in practice. We also provide an automated and easily applicable procedure for determining the threshold parameter of a generalized Pareto distribution by means of a given data set. Moreover, we supplement our findings with a thorough backtesting analysis.

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