The impact of extreme values on the assessment of financial assets

Abstract

This paper develops a new measure of systematic risk for investors in adverse disasters to cover themselves against large losses. Indeed, the frequent application of the average-downside risk capital asset pricing model (CAPM) provides spurious measures particularly during crises. To overcome this problem, this paper proposes, using the EVT, an extension of the Kaplanski's (2004b) CAPM average-CVaR based both on the downside risk and the impact of rare events on the stock return distribution. Using French data, the estimated value of the extreme beta provides a suitable measure of the risk in crisis periods, but overestimates it otherwise.