Financial Risk Manager Part 2
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A CRO is concerned that existing internal risk models of a firm, which are governed mainly by the central limit theorem, are not adequate in addressing potential random extreme losses of the firm. The CRO then recommends the use of extreme value theory (EVT). When applying EVT and examining distributions of losses exceeding a threshold value, which of the following 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.