"One important measurement issue concerns the fat tails problem that I mentioned earlier. VAR is concerned with extreme outcomes. If the tails of the probability distributions we are using are too thin, our VAR measures are likely to be too low"
- John C. Hull
About this Quote
In this quote, the author is going over a possible issue with a measurement tool called VAR (Value at Risk). He discusses the "fat tails issue," which refers to the shape of a possibility distribution. If the tails of the distribution are too thin, it implies that there is a low likelihood of severe results occurring. Nevertheless, VAR is specifically designed to determine severe outcomes, so if the tails are too thin, the VAR measures will not precisely show the prospective threats. This highlights the significance of utilizing precise and realistic likelihood distributions in order to acquire reputable measurements with VAR.
This quote is written / told by John C. Hull somewhere between October 31, 1939 and today. He was a famous Professor from USA.
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