Modelling extreme financial returns of global equity markets

Extreme asset price movements appear to be more pronounced recently and have
major consequences for an economy’s financial stability and monetary policies.
This paper investigates the extreme behaviour of equity market returns and
quantifies the probabilities of these losses. Taking fourteen major equity markets
the study is able to ascertain similarities and divergences in the tail returns from
around the world. To do so, it applies extreme value theory to equity indices
representing American, Asian and European markets. The paper finds that all
markets tail realisations are adequately modelled with the fat-tailed Fréchet
distribution. Furthermore tail realisations associated with the downside of a
distribution are greater than those associated with the upside, and extreme returns
for Asian markets are usually larger than their European and American
counterparts.