Scaling Of High-Quantile Estimators
by Matthias Degen of ETH Zurich, and
Abstract: Enhanced by the global financial crisis, the discussion about an accurate estimation of regulatory (risk) capital a financial institution needs to hold in order to safeguard against unexpected losses has become highly relevant again. The presence of heavy tails in combination with small sample sizes turns estimation at such extreme quantile levels into an inherently difficult statistical issue. We discuss some of the problems and pitfalls that may arise. In particular, based on the framework of second-order extended regular variation, we compare different high-quantile estimators and propose methods for the improvement of standard methods by focussing on the concept of penultimate approximations.
Keywords: Extreme Value Theory, Peaks Over Threshold, Penultimate Approximation, Power Normalization, Second-Order Extended Regular Variation.