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What is Time Scaling and Risk Underestimation about?

This document examines the common "square-root-of-time rule" used to scale risk over different time periods. It finds that this rule systematically underestimates risk when returns follow a jump diffusion process, as is often the case. Specifically, it shows the degree of underestimation increases with the time horizon, jump intensity, and confidence level. As a result, this rule fails to properly address the objectives of capital adequacy regulations which aim to prevent systemic crises. The paper argues j

Author

PeterParker1983

Language

EN