USING «FAT TAILS» DISTRIBUTIONS FOR RISK MANAGEMENT

  • Valentyn Hohlov
Keywords: distributions of stock returns, risk management, normal distribution, Student’s t distribution, Laplace distribution, fat tails

Abstract

Value at Risk (VaR) is one of the most important indicators used in risk management. Typically the normal distribution is used for its calculation, but the actual distribution of securities’ returns has much more probability in its tails than the normal distribution. In this article we derive VaR formulas for the Student’s t and Laplace distributions. Using assets on the U.S. and Russian stock market, we show that using these «fat-tailed» distributions lead to a significant increase in quality of risk measurement comparing to the normal distribution.

Published
2018-03-04
Section
Mathematical modeling and information technologies in economics