EVT seen by a Vet: a practitioner’s experience of extreme value theory
Financial shocks happen to be much more frequent than wanted. With longer life, and admittedly longer professional life, experience shows how difficult it is to manage through these events in a calm and efficient way. That is why a testimony about what extreme value theory (EVT) can bring can prove useful for some.
Misuse of the normal distribution
The starting point is around the inability to portray adequately the historical distributions of financial asset returns with classical tools, the normal distribution being the most frequently used, or should I say misused. Aside the well known paths, the aridity of the models has deterred many to try to implement them. It is a mistake, because EVT provides lots of tools in particular for risk management.
Use of extreme value theory
The contribution EVT seen by a Vet published in the Wiley handbook Extreme Events in Finance describes some of the applications of extreme value theory and their successes. Not mentioning the limitations of the approach and the work still to be achieved would not be realistic. But in a nutshell EVT has transformed the way modern financial institutions tackle rare events, or not so rare event after all…
CEO of Aviva Investors France