Fat tails

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…

Putting the smile back on the face of derivatives

Cross-asset quadratic Gaussian models have been limited in the scale of their implementation by the difficulty in ensuring the correct drift conditions to omit arbitrage. Here, Paul McCloud shows how to exploit the symmetries of the functional form to…

Rethinking (operational) risk management

For operational risk managers to really make a difference to their firms' fortunes, they must be willing to get their hands dirty and face facts, no matter how scary the facts may be, says Sergio Scandizzo, in the second of a two-part series

Operational VAR: a closed-form approximation

Klaus Böcker and Claudia Klüppelberg investigate a simple loss distribution model for operational risk. They show that, when loss data is heavy-tailed (which in practice it is), a simple closed-form approximation for operational VAR can be obtained. They…

VaR-x: Fat tails in financial risk management

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 Basel Committee on Banking Supervision, the parametric approach for estimating VaR needs to…

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