easy · FRM Part 2 Market Risk
An analyst is using Extreme Value Theory (EVT) and needs to choose between the Block Maxima and Peaks-over-Threshold (POT) approaches.
Why might they prefer the POT approach?
- It is only valid for portfolios exhibiting zero correlation among assets
- It makes more efficient use of data by including all exceedances above a threshold
- It requires no subjective judgment at all regarding the choice of threshold level
- It is guaranteed by the Fisher-Tippett theorem to always follow a normal distribution exactly
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