Extreme Events – Specimen Question A.4.2(d) – Answer/Hints

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Q. What lessons might you draw from (c) in terms of use of variance or variance-related risk statistics when used to estimate the likelihood of extreme events?


The main lesson that can be drawn from (c) is that if observations are likely to be drawn from quite fat-tailed distributions then the dominant drivers of likelihood of extreme events occurring may relate to the extent to which a possible contribution is fat-tailed, rather than the extent to which the contribution has high variability. This is essentially the same point as was noted in Chapter 4 of the book Extreme Events.


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