Buy side turns to extreme value theory to spot tail risks

Asset managers reappraise decades-old technique to gauge downside risks amid fears of volatile 2022


Faced with an uncertain market outlook for 2022, quants seeking a better gauge of portfolio tail risks are turning to a near-century-old statistical technique with its roots in the British cotton industry.

Value-at-risk’s limitations are well known when it comes to accurately gauging the tails of distributions. Instead, risk managers, trying to predict statistically infrequent events in asset classes where they only have a handful of observations from which to extrapolate a probability, are

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