Authors’ abstract: Extreme value theory provides a direct treatment of extreme events. It can deal with catastrophic losses that lie beyond a certain high threshold. Two models are frequently used in operational risk modeling: the block maxima and the peak over threshold model. Advantages include focusing on catastrophic events and easily available techniques for the estimation of the model parameters. Pitfalls lie in the resulting estimates of the aggregate expected loss and regulatory capital charge (Basel II) that may be unrealistically high.
For the entire collection see [Zbl 1201.90005].