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Journal of Financial Econometrics Advance Access originally published online on September 25, 2008
Journal of Financial Econometrics 2009 7(1):30-39; doi:10.1093/jjfinec/nbn015
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© The Author 2008. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Linear Correlation and EVT: Properties and Caveats

Paul Embrechts
     Department of Mathematics and RiskLab ETH Zurich, Switzerland

Address correspondence to Paul Embrechts, Department of Mathematics and RiskLab, ETH Zurich, Switzerland, or e-mail: embrechts{at}math.ethz.ch.

JEL Classification: C02, C40, C65, G32


  Abstract

Due to the current credit crisis, critical questions are being asked concerning some of the quantitative methods used in risk management under the Basel II proposals. In this paper I have given a critical look at Extreme Value Theory and Copulas. Both their potential applications and the possible caveats are discussed, and this mainly with the subprime crisis as a background.

KEYWORDS: copulas, credit risk, dependence modeling, extreme value theory, linear correlation, subprime crisis, quantitative risk management, value-at-risk

Received August 14, 2008; revised August 14, 2008; accepted August 21, 2008


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