Menu Expand

Risk Measurement with a Safety Belt: Pareto Meets Chebyshev

Cite JOURNAL ARTICLE

Style

Tödter, K. Risk Measurement with a Safety Belt: Pareto Meets Chebyshev. Credit and Capital Markets – Kredit und Kapital, 45(2), 175-187. https://doi.org/10.3790/kuk.45.2.175
Tödter, Karl-Heinz "Risk Measurement with a Safety Belt: Pareto Meets Chebyshev" Credit and Capital Markets – Kredit und Kapital 45.2, 2012, 175-187. https://doi.org/10.3790/kuk.45.2.175
Tödter, Karl-Heinz (2012): Risk Measurement with a Safety Belt: Pareto Meets Chebyshev, in: Credit and Capital Markets – Kredit und Kapital, vol. 45, iss. 2, 175-187, [online] https://doi.org/10.3790/kuk.45.2.175

Format

Risk Measurement with a Safety Belt: Pareto Meets Chebyshev

Tödter, Karl-Heinz

Credit and Capital Markets – Kredit und Kapital, Vol. 45 (2012), Iss. 2 : pp. 175–187

Additional Information

Article Details

Author Details

Dr. Karl-Heinz Tödter, Deutsche Bundesbank, Forschungszentrum (6), Postfach 10 06 02, D-60006 Frankfurt/M.

Abstract

Risk Measurement with a Safety Belt: Pareto Meets Chebyshev

Risk measures based on the Gaussian distribution are prone to understate the probability of extreme events. To capture fat tails and extreme events, we combine the Pareto law with finite variance bounds of Chebyshev. This density encompasses the tail behaviour of a wide range of random variables with unknown distribution. It provides a well-defined conservative measure of risks. Applications to measurement of forecast uncertainty and to value at risk and expected shortfall illustrate the approach empirically. (JEL D81, C53, G10)