Abstract

http://ssrn.com/abstract=1548892
 
 

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A Proposed Fat-Tail Risk Metric: Disclosures, Derivatives and the Measurement of Financial Risk


Peter Conti-Brown


Stanford Law School, Rock Center for Corporate Governance; Princeton University

February 6, 2010

Washington University Law Review, Vol. 87, p. 1461, 2010

Abstract:     
This paper argues that the financial regulatory reform currently debated in the U.S. Congress misses a key opportunity to address one of the central causes of the financial crisis: the failure of risk models to account for high impact, low probability events. The paper proposes a legal solution that will create a more robust metric: require mandatory disclosure of a firm’s exposure to contingent liabilities, such as guarantees for the debts of off-balance sheet entities, and all varieties of OTC derivatives contracts. Such disclosures - akin to publicly traded corporations’ public filings with the SEC - will allow regulators and researchers to approximate an apocalyptic, black-out, no-bankruptcy-protection and no-bailout scenario of a firm's implosion; force firm’s to maintain daily record-keeping on such obligations, a task which has proved difficult in the past; and, most importantly, will open up a crucial subset of data that has, until now, been opaque or completely invisible. With such data, researchers, over time, will develop analytical and econometric tools that better assess the consequences of remote events for individual firms and, more importantly, the economy as a whole.

Number of Pages in PDF File: 14

Keywords: OTC Derivatives, Too Big To Fail, Value-At-Risk, Risk, Disclosure, Financial Crisis, Financial Regulatory Reform

JEL Classification: G33, G38

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Date posted: February 6, 2010 ; Last revised: February 17, 2011

Suggested Citation

Conti-Brown, Peter, A Proposed Fat-Tail Risk Metric: Disclosures, Derivatives and the Measurement of Financial Risk (February 6, 2010). Washington University Law Review, Vol. 87, p. 1461, 2010. Available at SSRN: http://ssrn.com/abstract=1548892

Contact Information

Peter Conti-Brown (Contact Author)
Stanford Law School, Rock Center for Corporate Governance ( email )
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650 799 7232 (Phone)
Princeton University ( email )
22 Chambers Street
Princeton, NJ 08544
United States
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