Subjectivity in conventional tail measures: An exploratory model with 'risks & biases’

Debasish Majumder

Finance Research Letters, 2023, vol. 55, issue PB

Abstract: Economic models are often based on some input parameters, whose values are decided by judgement. The approach is practical as judgment or intuition reduces complexity to a manageable level. A critical input parameter, for example, in the case of tail measures would have been the risk tolerance level, which was prescribed as 99th percentile or even higher on certain occasions for Value-at-Risk by post-2010 international regulatory bodies. Conversely, our paper proposes a model-based approach for estimation of the same. Our formulation is effective in reducing the biases that can creep into the process through adoption of heuristics in model formulation.

Keywords: Tail risk models; generalised Pareto distribution (GPD); Coefficient of variation; The risk tolerance level; Cognitive bias; Nowcasting (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:55:y:2023:i:pb:s1544612323003239

DOI: 10.1016/j.frl.2023.103951

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