The Fundamental Review of the Trading Book and fat tails

Conservative capital buffers may not be enough to protect against tail events

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Thomas Roos calculates the probability of returns exceeding a multiple of expected shortfall for fat-tailed portfolios. The results show that, taken in isolation, the Basel III Fundamental Review of the Trading Book market risk capital requirements are insufficient to prevent a large number of insolvencies. The impact of applying a cutoff to the tail distribution is also examined

As part of the Basel III Fundamental Review of the Trading Book (FRTB), the Basel

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