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Extreme Events and Extreme Value Theory (EVT) [18]

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Bullet points include: Potentially relevant to risk management (and pricing). Capital adequacy seeks to protect against (we hope) relatively rare events. Pricing often dominated by potential magnitude and likelihood of large losses, which are also (we hope) rare. EVT appears to offer a convenient way of identifying shape of the ‘tail’ distribution, which should be very valuable for such purposes. But bear in mind. Inherent unreliability of extrapolation – including extrapolation into the tails of a probability distribution. Possibility (indeed probability) that the world is not time stationary

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