Introduction to R for Quantitative Finance

Summary

In this chapter, we presented a case study of how Extreme Value Theory methods can be used in R in a real-life risk management application. After briefly covering the theory of threshold exceedance models in EVT, we worked through a detailed example of fitting a model to the tails of the distribution of fire insurance claims. We used the fitted model to calculate high quantiles (Value at Risk) and conditional expectations (Expected Shortfall) for the fire losses. The presented methods are readily extendable to market, credit, or operational risk losses as well.