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 larger number of blocks to converge to the GPD than Block Maxima requires for the GEV.
- Both approaches assume a Normal distribution for the tail to ensure the 'Square-Root-of-Time' rule remains valid for 10-day VaR.
- Block Maxima uses the Generalized Pareto Distribution (GPD); POT uses the GEV to model the frequency of threshold violations.
- 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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