What exactly is extreme value theory and how relevent is it to finance?

http://en.wikipedia.org/wiki/Extreme_value_theory

check out Wilmott Issue March 2005 : Mandelbrot's Extremism, p.97-103

If you are mathematically oriented, you might want to check Embrecht's book out of the library.One amazing result (if I understood it correctly): under certain assumptions about lack of memory effects, and probably other things i can't remember, extreme values end up being distributed according to one of three distributions:they are the Gumbel, Weibull and Frechet distributions, if memory serves right.It's sort of like the law of large numbers and the gaussian distribution, but for extreme values you get three possible limiting distributions.Relevance to insurance is pretty obvious - relevance to finance relates to risk management and allocating capital to a trade, amongst other things.

Erstwhile,could you give us a few more details on Embrecht's book? I couldn't find any candidates on Amazon.

Modelling Extremal Events for Insurance and Finance (Stochastic Modelling and Applied Probability) by Paul Embrechts, Claudia Klüppelberg, Thomas MikoschISBN: 3540609318

Ah, it was the apostrophe that threw me. Thanks.