The Cost of Conservatism: Extreme Returns, Value-at Risk, and the Basle Multiplicaiton Factor
Philipp Hartmann and
Jon Danielsson ()
FMG Special Papers from Financial Markets Group
We argue that most current methodologies for value-at-risk (VaR) underestimate the VaR, and are therefore ill-suited for market risk capital. Better VaR methods are available, such as the tail-fitting method proposed here. However, financial institutions may be relctant to use those mehtods since current market risk regulations may, perversely, provide incentives for banks to underestimate the VaR.
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