Capturing fat tails

Financial institutions are more aware of the risks posed by high-impact events since the crisis, but the question is how to encapsulate these in models. Zari Rachev, Boryana Racheva-Iotova and Stoyan Stoyanov discuss three approaches for capturing fat tails

In this post-crisis era, there is universal agreement that financial assets are indeed fat-tailed and that investment managers must take extreme events into account as part of their everyday risk management processes. But deliberation continues at a high level on how risk management approaches and practices should change. While academic research has provided a vast offering of modern risk methods and analytic techniques, the race to integrate them into standard risk platforms has just begun.


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