VAR Plus: Fat Tails in Financial Risk Management
Working Paper No. 98/51
Posted: 6 Oct 1998
Date Written: August 1998
To ensure a competent regulatory framework with respect to Value-at-Risk for establishing Bank's capital adequacy requirements, as promoted by the Basle Committee, then the parametrical approach to estimate VaR needs to incorporate fat tails, apparent in the return distributions of financial assets. This paper provides a simple method to obtain accurate parametric VaR measures by including a specific measure for the tail fatness of an asset's return distribution. We provide evidence for the accuracy of these VaR+ estimates by comparing different parametric VaR estimators for bi-weekly returns on US stock and bond returns.
JEL Classification: C40, C51, G28
Suggested Citation: Suggested Citation