Extreme global equity market risk

Extreme asset price movements appear to be more pronounced over time
and have major consequences for an economy’s financial stability and monetary policies.
This article investigates the extreme behaviour of equity market returns and quantifies the
probabilities of these losses. Taking 14 major equity markets, the study illustrates similarities
and divergences in the tail returns from around the world. To do so, it applies extreme
value theory to equity indexes representing American, Asian and European markets. The
article 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.