FRTB and Fat Tails
21 Pages Posted: 15 Oct 2020 Last revised: 11 Nov 2020
Date Written: October 9, 2020
We calculate the probability of returns exceeding a multiple of Expected Shortfall for fat-tailed portfolios. Our results show that, taken in isolation, the Basel 3 FRTB Market Risk capital requirements are insufficient to prevent a large number of insolvencies. The impact of applying a cutoff to the tail distribution is also examined.
Keywords: FRTB, Market Risk, Fat Tails, Power Law, Pareto, Basel
JEL Classification: G21,G28
Suggested Citation: Suggested Citation