The table below presents a practical application of Extreme Value Theory (EVT) by showing on the left the percentage of capital you may lose and on the right, the probabilities of this happening. This data is calculated using the returns produced by Ubajay, providing a clear representation of potential risks.
EVT is a branch of statistics dealing with extreme deviations from the median of probability distributions. It is invaluable for assessing the risk of rare events that could lead to significant financial losses in investment portfolios or insurance claims. Unlike average events closer to the mean, EVT focuses on the tails of distributions where these rare but impactful events occur.
By analyzing past data and applying mathematical models, EVT estimates the probability and potential impact of extreme market movements. This analysis allows investors and risk managers to prepare for worst-case scenarios by understanding their exposure to potentially catastrophic losses. Such insights into the likelihood and severity of potential losses are crucial for informed decision-making and effective risk mitigation strategies.
