Parametric Approaches (II): Extreme Value (FRM Part 2 2023 – Book 1 – Chapter 3)

For FRM (Part I & Part II) video lessons, study notes, question banks, mock exams, and formula sheets covering all chapters of the FRM syllabus, click on the following link: https://analystprep.com/shop/unlimite...

AnalystPrep is a GARP-Approved Exam Preparation Provider for FRM Exams

After completing this reading you should be able to:
Explain the importance and challenges of extreme values in risk management.
Describe extreme value theory (EVT) and its use in risk management.
Describe the peaks-over-threshold (POT) approach.
Compare and contrast generalized extreme value and POT.
Evaluate the tradeoffs involved in setting the threshold level when applying the generalized Pareto (GP) distribution.
Explain the importance of multivariate EVT for risk management

0:00 Introduction
2:31 Learning Objectives
3:45 What are Extreme Values?
4:47 Challenges of Extreme Values
7:11 Extreme Value Theory (EVT) in Finance
9:54 Illustrating Block Maxima
11:36 Cases of the GEV Distribution
12:56 Standardized Fréchet and Gumbel Probability Density Functions
15:19 Interpreting GEV Quantiles
15:57 Gumbel and Fréchet VaR
18:48 The Peaks-Over-Threshold (POT) Approach
22:49 What Happens as u Gets Large?
24:42 VaR and Expected Shortfall
25:36 Importance of Multivariate EVT for Risk Management