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ERM Glossary: Extreme event

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Extreme events are outcomes that lie in the tail of the total loss or payoff distribution of the enterprise. As explained in Kemp (2010), what is or is not an ‘extreme event’ always implicitly requires some prior probability distribution against which observed outcomes are being compared.

 

Measuring and modelling such risks is difficult, not least because there is usually relatively little data available relating to the tails of the distribution. For some types of risk, modelling of extreme events may benefit from the use of Extreme Value Theory (EVT). For further information on EVT see here.

 


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