New method accurately predicts extreme financial risks for better risk management.
The article discusses how companies can measure and manage potential risks that could impact their goals. Traditional methods of calculating risk, like Value at Risk (VaR), may not accurately capture extreme events that could lead to significant losses. To address this, researchers propose using the Maximum Entropy bootstrapping method, which maximizes uncertainty in probability distributions to better account for extreme data values. This approach helps in managing risks like credit and market risks in banking and insurance sectors.