A body of statistics that models only the tail of a distribution. It is used to estimate rare losses beyond what the data directly cover.
Where you will meet it
Extreme value theory comes up in 3 learning outcome notes across the FRM syllabus.
A few of them:
Parametric Approaches (II): Extreme Value FRM Part II · Market risk measurement and management
“Extreme value theory (EVT) is the statistical theory of the limiting behaviour of the largest observations, so it models the tail directly instead of the whole distribution.”
Parametric Approaches (II): Extreme Value FRM Part II · Market risk measurement and management
“The generalized extreme value (GEV) approach and peaks over threshold (POT) both rest on EVT but use the data differently.”
Parametric Approaches (II): Extreme Value FRM Part II · Market risk measurement and management
“Multivariate EVT extends the tail modelling to several risk factors at once.”
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