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The Cost of Conservatism: Extreme Returns, Value-at Risk, and the Basle Multiplicaiton Factor

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  • Philipp Hartmann
  • Jon Danielsson

Abstract

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.

Suggested Citation

  • Philipp Hartmann & Jon Danielsson, 1998. "The Cost of Conservatism: Extreme Returns, Value-at Risk, and the Basle Multiplicaiton Factor," FMG Special Papers sp100, Financial Markets Group.
    • Handle: RePEc:fmg:fmgsps:sp100
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    File URL: http://www.lse.ac.uk/fmg/documents/specialPapers/1990s/sp100.pdf
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