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Answer: Fat-tailed distribution
Fat-tailed distributions (leptokurtic distributions) have more extreme values in the tails than the normal distribution. When using VaR models that assume normal distribution, the actual risk is underestimated because extreme losses occur more frequently than predicted by the normal distribution.
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The VaR would be underestimated because of the greater frequency of losses in the tails of the distribution.
A
Fat-tailed distribution
B
Normal distribution
C
Uniform distribution
D
Lognormal distribution