Learning extreme Expected Shortfall with neural networks. Application to cryptocurrency data
Abstract
We propose new parametrizations for neural networks in order to estimate extreme Expected Shortfall in heavy-tailed settings as a function of confidence levels. The proposed neural network estimator is able to extrapolate in the distribution tails thanks to an extension of the usual extreme-value second-order condition to an arbitrary order. The convergence rate of the uniform error between the extreme log-Expected Shortfall and its neural network approximation is established. The finite sample performance of the neural network estimator is compared to bias-reduced extreme-value competitors on simulated data. It is shown that our method outperforms them in difficult heavy-tailed situations where other estimators almost all fail. Finally, the neural network estimator is tested on real data to investigate the behavior of cryptocurrency extreme loss returns.
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