Francis X. Diebold, Til Schuermann, John D. Stroughair
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.
Diebold: fdiebold@mail.sas.upenn.edu
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