Financial Risk Manager Part 2
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The CRO of a regional bank expresses concern in a meeting of the risk team that the bank's internal risk models are not adequately assessing potential random extreme losses. A risk analyst asks if implementing a model based on extreme value theory (EVT) would address the CRO's concern. Which of the following is correct when applying EVT and examining distributions of losses exceeding a threshold value?
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.