Extreme value theory and credit spreads
Wesley K.S Phoa – Senior Vice President at Capital Group

Most work applying extreme value theory to financial markets has focused on equity and foreign exchange markets, where high frequency data is readily available. This paper explains some difficulties involved in applying EVT to credit markets, and discusses some sample estimation results, both univariate and multivariate. Finally, we discuss some practical portfolio management applications.


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Wesley K.S. Phoa

Wesley K.-S. Phoa is a fixed income portfolio manager at Capital Group. He is also an economist, and follows U.S. monetary policy, macro-prudential regulation and fixed-income quantitative research. He holds a PhD in pure mathematics from Trinity College at the University of Cambridge. He is an elected member of the Conference of Business Economists and the International Conference of Commercial Bank Economists, and sits on the editorial advisory board of The Journal of Portfolio Management. To know more…

 

“Dealing with tail risk is one of the most important tasks of a portfolio manager, but also one of the most difficult. This is especially true for bond portfolios. Extreme value theory provides a set of robust tools for understanding and, hopefully, managing the tail risks involved in bond investing.”

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