Perhaps I'm just missing something, but I do not understand how the "once-in-100-year loss" corresponds to the 90th percentile of the GPD. Any help would be greatly appreciated. Thanks!
hi, this is because the 1/100 event means that the distribution only starts to take the GPD shape from the 90th percentile onwards. the 99% VaR will correspond to the remaining 9% (from overall distribution) from that point onwards - this is 0.9 of the overall GPD (since the whole GPD only takes up 10% of the overall distribution), i.e. 90% x 10%. so if we had wanted the 95% VaR - this will be 0.5 of the GPD (0.9 + 0.5 x 0.1 = 95%) - i think this is how it works. hope this helps
That was not at all obvious from the solution. What you've provided, though, seems correct; thank you!
