Risk Measurement with a Safety Belt: Pareto Meets Chebyshev
JOURNAL ARTICLE
Cite JOURNAL ARTICLE
Style
Format
Risk Measurement with a Safety Belt: Pareto Meets Chebyshev
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)