Journal of Risk

VaR-x: Fat tails in financial risk management

Ronald Huisman and Rachel A. J. Pownall, Kees G. Koedijk


To ensure a competent regulatory framework with respect to value-at-risk (VaR) for establishing a bank's capital adequacy requirements, as promoted by the Basle Committee on Banking Supervision, the parametric approach for estimating VaR needs to incorporate the fat tails apparent in the return distributions of financial assets. This paper provides a simple method to obtain accurate parametric measures by including a specific measure VaR for the tail fatness of an asset's return distribution: VaR-x. Evidence is provided for the accuracy of these VaR-x estimates by comparing different parametric VaR estimators for bi-weekly returns on US stocks and bonds.

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