hard · FRM Part 2 Market Risk
In Parametric Tail Modeling, a practitioner must choose between the Block Maxima approach and the Peaks Over Threshold (POT) approach.
Which statement correctly identifies the distributional choice and its implications for data efficiency?
- POT is less efficient because it requires a much larger number of observed blocks to converge to the fitted GPD than Block Maxima needs for its GEV tail model.
- Both approaches actually assume a Normal tail distribution, which conveniently keeps the 'Square-Root-of-Time' scaling rule valid for a 10-day VaR figure.
- Block Maxima uses the Generalized Pareto Distribution (GPD) for its single largest fitted tail observation; POT instead uses the GEV to model violation frequency.
- Block Maxima uses the Generalized Extreme Value (GEV) distribution; POT uses the Generalized Pareto Distribution (GPD) and is generally more data-efficient.
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