easy · FRM Part 2 Market Risk
A desk is modeling the tail of a portfolio with heavy-tailed losses. They decide to use Extreme Value Theory (EVT).
If they partition their 10-year data set into 40 quarterly blocks and fit the maximum loss from each block to a distribution, which distribution and framework are they applying?
- Generalized Extreme Value (GEV) distribution via the Block Maxima framework.
- Lognormal distribution with a volatility shift.
- Generalized Pareto Distribution (GPD) via the Peaks-over-Threshold (POT) framework.
- Student-t distribution with low degrees of freedom.
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