medium · FRM Part 2 Market Risk
In the context of Extreme Value Theory (EVT), why is the Peaks Over Threshold (POT) approach generally considered more data-efficient than the Block Maxima approach?
- POT automatically accounts for volatility clustering by using a time-varying threshold, while Block Maxima is purely static.
- POT uses the Generalized Extreme Value (GEV) distribution which has fewer parameters to estimate than the Generalized Pareto Distribution (GPD).
- POT utilizes all observations exceeding a high threshold, whereas Block Maxima discards all but the largest single observation in each period.
- Block Maxima requires the data to be non-stationary, while POT is only valid for i.i.d. Gaussian returns.
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