International Journal of Economics & Management Sciences

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Purpose: This study analyse the asymptotic behavior of the tails of the return distributions in emerging markets through the lens of extreme value theory. It estimates and compares efficacy of the EVT based value at risk in emerging markets like Brazil(Bo Vespa), Russia(MOEX), India(Nifty 50), Bahrain(Share BAX), China(Shanghai), Colombia(COLCAP), Malaysia(FTSE), Thailand(SET INDEX), Argentina(Marvel), Bangladesh(Dhaka Stock Exchange), Pakistan(KSE 100) and Sri Lanka(CSE)) by using daily data for the period 2000-2018.

Methodology: The study employs block maxima model (BMM) based on generalized extreme value distribution (GEV) and peak over threshold model (POTM) based on generalized Pareto distribution (GPD). Peak over threshold model is applied under the assumption of unconditional and conditional volatility. Use of conditional EVT to estimate VaR is proposed by McNeil and Frey (2000) to capture the heteroscedasticity in extreme returns arising from stochastic volatility. Finally, the efficacy of models is evaluated through backtesting techniques proposed by Kupiec (1995) and Christoffersen (1998).

Findings: The Block maxima model underestimates risk whereas condition POT model overestimates risk at 95% and 99% confidence level. EVT based unconditional POT model performs better in comparison to the GEV based block maxima model and EVT based conditional POT model in all selected countries of emerging markets. The results are consistent under various backtesting approaches as the performance of the model does not change with an increase in confidence level. The difference of risk may be the outcome of role of equity markets in a country, levels of disclosure, governance laws and ownership structure.

Value: This study has important implication for portfolio managers in making the decision regarding resource allocation, portfolio diversification and risk management as EVT based unconditional POT model can be used for modeling risk of extreme events in emerging markets.

The enthrall of this paper is based on the economic, social and political issues. It reflects present and future challenges for competitiveness and economic development in the global changing environment. International business encompasses all commercial activities that take place to promote the transfer of goods, services, resources, people, ideas and technology across national boundaries. It occurs in many different forms, the movement of goods from one country to another (exporting, importing trade), contractual agreements that allows foreign firms to use products, services and processes from other nations (licencing, franchising), the formation of operations of sales, manufacturing, research and development, distribution facilities in foreign markets. The aim of this paper is to introduce, analyze and explain international business in an important emerging light of globalization.