Download or read book Fat-Tails and their (Un)Happy Endings written by International Monetary Fund and published by International Monetary Fund. This book was released on 2011-04-01 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: The correlation bias refers to the fact that claim subordination in the capital structure of the firm influences claim holders’ preferred degree of asset correlation in portfolios held by the firm. Using the copula capital structure model, it is shown that the correlation bias shifts shareholder preferences towards highly correlated assets, making financial institutions more prone to fail and increasing systemic risk given interconnectedness in the financial system. The implications for systemic risk and prudential regulation are assessed under the prism of Basel III, and potential solutions involving changes to the prudential framework and corporate governance are suggested.