Linear Correlation and EVT: Properties and Caveats

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. Copyright The Author 2008. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.