The concept of Value at Risk(VaR) estimates the maximum loss of a financial
position at a given time for a given probability. This paper considers the
adequacy of the methods that are the basis of extreme value theory in the
Montenegrin emerging market before and during the global financial crisis. In
particular, the purpose of the paper is to investigate whether the
peaks-over-threshold method outperforms the block maxima method in evaluation
of Value at Risk in emerging stock markets such as the Montenegrin market.
The daily return of the Montenegrin stock market index MONEX20 is analyzed
for the period January 2004 - February 2014. Results of the Kupiec test show
that the peaks-over-threshold method is significantly better than the block
maxima method, but both methods fail to pass the Christoffersen independence
test and joint test due to the lack of accuracy in exception clustering when
measuring Value at Risk. Although better, the peaks-over-threshold method
still cannot be treated as an accurate VaR model for the Montenegrin frontier
stock market.
Determining the premium of paddy insurance using the extreme value theory method and the operational value at risk approach