Stress testing / Liquidity and funding risk [5]

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Bullet points include: Commercial risk systems often assume that future returns will be (log)-Normally distributed They may therefore not cope well with extreme events, i.e. ‘fat tails’ These are the events that generate the most press Even if models do assume non-Normality, how much non-Normality should we assume? Some risks like liquidity risk are very fat-tailed and very difficult to model

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