An EVT Primer for Credit Risk

by Valérie Chavez-Demoulin of EPF Lausanne, and
Paul Embrechts of ETH Zurich

May 25, 2009

Abstract: We review, from the point of view of credit risk management, classical Extreme Value Theory in its one-dimensional (EVT) as well as more-dimensional (MEVT) setup. The presentation is highly coloured by the current economic crisis against which background we discuss the (non-)usefulness of certain methodological developments. We further present an outlook on current and future research for the modelling of extremes and rare event probabilities.

Keywords: Basel II, Copula, Credit Risk, Dependence Modelling, Diversification, Extreme Value Theory, Regular Variation, Risk Aggregation, Risk Concentration, Subprime Crisis.

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