Measuring Market Risk Using Extreme Value Theory: An Empirical Study Using South African Rand/Dollar One-Year Futures Contract

Extreme events in financial markets are central issues in finance and particularly in risk management and financial regulation. Value at Risk and Expected Shortfall emerged as standard tools for measuring market risk. However, no consensus has yet been reach as to the best method to implement these measures. All conventional methods have significant shortfalls. Extreme Value Theory (EVT) provides a natural approach to the calculation of extreme market risk. The aim of the paper is to illustrate the use of the peaks-over-threshold method of EVT to measure extreme market risk. The technique will be applied to the South African Rand/Dollar One Year Futures Contract.