Handbook of Heavy Tailed Distributions in Finance

6 Univariate extreme value theory

Managing extreme market risk is a goal of any financial institution or individual investor. In an effort to guarantee solvency, financial regulators require most financial institutions to maintain a minimum level of capital in reserve. The recommendation of the Basle Committee (1995b) of a minimum capital reserve requirement based on Var is an attempt to manage extreme market risks. Recall that Var is nothing more that a quantile of a probability distribution. The minimum capital reserve is then a multiple of this high quantile, usually computed with $\alpha =0.99$. Therefore it is very important to attempt to model correctly ...