At present EVT is really only practically applicable to single assets. There is no easy
to implement multivariate application available at the time of writing. Given the
amount of academic effort going into this subject and some early indications of
progress it is likely that a tractable multivariate solution will evolve in the near
future. It is, of course, possible to model the whole portfolio as a single composite
‘asset’ but this approach would mean refitting the distribution every time the portfolio
changed, i.e. daily.
For single assets and indices EVT is a powerful tool. For significant exposures to
single-asset classes the results of EVT analysis are well worth the effort. Alexander
McNeil (1998) gives an example of the potential of EVT. McNeil cites the hypothetical
case of a risk analyst fitting a Fre´chet distribution to annual maxima of the S&P 500
index since 1960. The analyst uses the distribution to determine the 50-year return
level. His analysis indicates that the confidence interval for the 50-year return lies
between 4.9% and 24%. Wishing to give a conservative estimate the analyst reports
the maximum potential loss to his boss as a 24% drop. His boss is sceptical. Of
course the date of this hypothetical analysis is the day before the 1987 crash – on
which date the S&P 500 dropped 20.4%. A powerful demonstration of how EVT can
be used on single assets.
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