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Fat Tails and Extreme Events [23]

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Bullet points include: Banks that failed during 2007-09 Credit Crisis were disproportionately biased towards strategies that depended on continuing favourable liquidity conditions. Liquidity risk is highly skewed, i.e. highly fat-tailed. I.e. these banks were (consciously or unconsciously) biasing their business strategies towards ones that had fat-tailed characteristics. No wonder traditional risk models appear to have underestimated potential magnitudes of adverse outcomes!

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