Financial Risk Manager Part 2
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A Chief Risk Officer (CRO) is concerned that the company's existing internal risk assessment models may not adequately manage potential unexpected substantial losses. To address this, the CRO proposes the application of Extreme Value Theory (EVT). When using EVT to examine the distributions of losses that exceed a specific threshold, what is the correct methodology to follow?
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.