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ESTIMATION OF THE PROBABLE MAXIMUM LOSS BASED ON EXTREME VALUE THEORY FOR STOCK RETURNS

Marcin Faldzinski ()

Equilibrium. Quarterly Journal of Economics and Economic Policy, 2009, vol. 2, issue 1, 51-59

Abstract: The probable maximum loss is a measure that originated on the insurance market, where it is applied for insurance portfolio analysis. This corresponds to the 20-80 rule, which states that in a well defined portfolio 20% of the individual claims is responsible for more than 80% of the total claim amount. The paper presented attempts to estimate the probable maximum loss for stock returns which are treated as portfolios of securities. The probable maximum loss proved to be a useful tool for risk analysis or/and other diagnostic purposes on capital markets, it should be noted; however, that it has its drawbacks as well.

Keywords: probable maximum loss; extreme value theory (search for similar items in EconPapers)
Date: 2009
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