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Value at risk (VaR) is today the standard tool in risk management for banks and other financial institutions. It is defined as the worst loss for a given confidence level: For a confidence level of e.g. p=99%, one is 99% certain that at the end of a chosen risk horizon there will be no greater...
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This paper shows how financial contracts might be redesigned to allow for banks to manage the idiosyncratic component for their own accounts.
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