EVT and alternatives [10]

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Bullet points include: EVT an enticing prospect. Appears to offer a mathematically sound way of identifying shape of the ‘tail’ of a distribution, and hence identifying likelihood of extreme (i.e. rare) events. Capital adequacy seeks to protect against (we hope) relatively rare events. Insurance and credit risk pricing can be dominated by potential magnitude and likelihood of large losses, which are also (we hope) rare. 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. We may need to consider a multivariate analogue for portfolio construction

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