Where is that Elusive 1-Year Tail?
Document ID: 2007-215 (previously Issue 2)
Published on: 30th June 2007
Author: John Hibbert
Estimates of the location of the ‘tails’ of the equity returns distribution are now a key part of economic capital assessment work for life insurers. In this note we take a very brief look at some possible approaches to estimation of the 99th percentile tail position and highlight one approach we just don’t like: ‘bootstrapping’ (i.e. sampling) daily price changes or returns from the past empirical distribution to manufacture a distribution of possible 1-year returns. In its simplest form, this technique ignores the time series structure of historic data and as a consequence we believe that it will underestimate the severity of the 1-year equity tail.
