|Overview: Extreme Value Theory|
A branch of statistics that deals with extreme values.
Calculating the chance of outcomes with small probabilities but high impact.
What is Extreme Value Theory?
John Spacey, updated on July 26, 2016
Extreme value theory is a branch of statistics that deals with extreme values. Standard statistical methods tend to be oriented towards measuring values somewhere near average. Extreme value theory is a special class of methods that attempt to estimate the probability of distant outliers. One such method is known as Fisher–Tippett–Gnedenko theorem, or simply the extreme value theorem. Risk management makes use of extreme value theory to estimate risks that have low probability but high impact such as large earthquakes, hurricanes, rogue waves, forest fires, market collapses, disasters and pipeline failures. Extreme value theory can also be used to calculate the probability of positive things such as the rare stocks that eventually appreciate in price by 100x or more.
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