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|Title: ||Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management|
|Authors: ||Diebold, Francis X.|
Stroughair, John D.
|Issue Date: ||Mar-1998 |
|Series/Report no.: ||FIN-98-081|
|Abstract: ||Recent 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.|
|Appears in Collections:||Finance Working Papers|
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