VAR Plus: Fat Tails in Financial Risk Management

Working Paper No. 98/51

Posted: 6 Oct 1998

See all articles by Rachel A.J. Pownall

Rachel A.J. Pownall

Tilburg University - Department of Finance; Maastricht University - Department of Finance

Kees C. G. Koedijk

Tilburg University - Department of Finance

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: August 1998

Abstract

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

Pownall, Rachel Ann Jane and Koedijk, Kees G. and Huisman, Ronald, VAR Plus: Fat Tails in Financial Risk Management (August 1998). Working Paper No. 98/51. Available at SSRN: https://ssrn.com/abstract=115798

Rachel Ann Jane Pownall (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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