Sign up ×  Say I have a limited sample, a month of daily
returns, and I want to estimate the 99.5th percentile of the
distribution of absolute daily returns.  Because the estimate
will require extrapolation, I will need to make a distributional
assumption. Is there a standard approach to take here if I want
to include the higher kurtosis in my estimate?  share|improve
this question  1 Answer 1  up vote 6 down vote accepted  What
you refer to as the 99.5th percentile is known as the "Value-at-
Risk." You are correct that you will need to make a
distributional assumption, and there is a popular and well-
researched approach to this problem, though I'm not certain it
could be called "standard." I would recommend you use the
"truncated Levy flight" distribution. James Xiong at Morningstar
has written a few papers on this topic, and you can find more by
googling him and this topic. Here is a less technical, more
introductory piece on the topic.  Also, you should consider
other risk measures, most notably Expected Sh