The recently finalized Basel II Capital Accord requires banks to adopt a procedure to estimate the operational risk capital charge. Under the Advanced Measurement Approaches, that are currently mandated for all large internationally active US banks, require the use of historic operational loss...

For purposes of Value-at-Risk estimation, we consider several multivariate families of heavy-tailed distributions, which can be seen as multidimensional versions of Paretian stable and Student's t distributions allowing different marginals to have different indices of tail thickness. After a...

In this article, we introduce two new six-parameter processes based on time-changing tempered stable distributions and develop an option pricing model based on these processes. This model provides a good fit to observed option prices. To demonstrate the advantages of the new processes, we...

There is considerable empirical evidence that financial returns exhibit leptokurtosis and nonzero skewness. As a result, alternative distributions for modelling a time series of the financial returns have been proposed. A family of distributions that has shown considerable promise for modelling...

There appears to be a consensus that the recent instability in global financial markets may be attributable in part to the failure of financial modeling. More specifically, current risk models have failed to properly assess the risks associated with large adverse stock price behavior. In this...

Using four years of second-by-second executed trade data, we study the intraday effects of a representative group of scheduled economic releases on three exchange rates: EUR/$, JPY/$ and GBP/$. Using wavelets to analyze volatility behavior, we empirically show that intraday volatility clusters...

Recently, a body of academic literature has focused on the area of stable distributions and their application potential for improving our understanding of the risk of hedge funds. At the same time, research has sprung up that applies standard Bayesian methods to hedge fund evaluation. Little or...

We consider a new approach towards stochastic dominance rules which allows measuring the degree of domination or violation of a given stochastic order and represents a way of describing stochastic orders in general. Examples are provided for the n-th order stochastic dominance and stochastic...

We consider the sensitivity of conditional value-at-risk (CVaR) with respect to the tail index assuming regularly varying tails and exponential and faster-than-exponential tail decay for the return distribution. We compare it to the CVaR sensitivity with respect to the scale parameter for stable...

In the post-crisis era, financial institutions seem to be more aware of the risks posed by extreme events. Even though there are attempts to adapt methodologies drawing from the vast academic literature on the topic, there is also skepticism that fat-tailed models are needed. In this paper, we...