Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management
AbstractRecent literature has trumpeted the claim that extreme value theory (EVT) holds promise for accurate estimation of extreme quantiles and tail probabilities of financial asset returns, and hence hold promise for advances in the management of extreme financial risks. Our view, based on a disinterested assessment of EVT from the vantage point of financial risk management, is that the recent optimism is partly appropriate but also partly exaggerated, and that at any rate much of the potential of EVT remains latent. We substantiate this claim by sketching a number of pitfalls associate with use of EVT techniques. More constructively, we show how certain of the pitfalls can be avoided, and we sketch a number of explicit research directions that will help the potential of EVT to be realized.
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Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 98-081.
Date of creation: Mar 1998
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Web page: http://w4.stern.nyu.edu/finance/
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Other versions of this item:
- Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998. "Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management," Center for Financial Institutions Working Papers 98-10, Wharton School Center for Financial Institutions, University of Pennsylvania.
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