Ultimate access to all questions.
Answer-first summary for fast verification
Answer: As the threshold value is increased, the distribution of losses over a fixed threshold value converges to a generalized Pareto distribution.
A is correct. A key foundation of EVT is that as the threshold value is increased, the distribution of loss exceedances converges to a generalized Pareto distribution. Assuming the threshold is high enough, excess losses can be modeled using the generalized Pareto distribution. It is known as the Gnedenko-Pickands-Balkema-deHaan (GPBdH) theorem and is heavily used in the peaks-over-threshold (POT) approach.
Author: LeetQuiz Editorial Team
No comments yet.
During a recent risk team meeting at a regional bank, the Chief Risk Officer (CRO) expressed concerns about the bank's internal risk models, specifically their inadequacy in properly assessing potential random extreme losses. A risk analyst considers whether implementing a model based on extreme value theory (EVT) would address these concerns. In the context of applying EVT to analyze distributions of losses that exceed a certain threshold, which of the following statements is correct?
A
As the threshold value is increased, the distribution of losses over a fixed threshold value converges to a generalized Pareto distribution.
B
If the tail parameter value of the generalized extreme-value (GEV) distribution goes to infinity, then the GEV essentially becomes a normal distribution.
C
To apply EVT, the underlying loss distribution must be either normal or lognormal.
D
The number of exceedances decreases as the threshold value decreases, which causes the reliability of the parameter estimates to increase.