On the Estimation of Extreme Values for Risk Assessment and Management: The ACER Method
Peer reviewed, Journal article
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Original versionInternational journal of business. 2015, 20 (1), 33-51.
In this paper we use an Average Conditional Exceedance Rate (ACER) method to model the tail of the price change distribution of daily spot prices in the Nordic electricity market, Nord Pool Spot. We use an AR-GARCH model to remove any seasonality, serial correlation and heteroskedasticity from the data before modelling the residuals from this filtering process with the ACER method. We show that using the conditional ACER method for Value-at-Risk forecasts give significant improvement over a standard AR-GARCH model with normal or Student’s-t distributed errors. Compared to a conditional generalized Pareto distribution (GPD) fitted with the Peaks-over-Threshold (POT) method, the conditional ACER method produces slightly more accurate quantile forecasts for the highest quantiles.