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Applying EVT and alternatives to portfolio construction and the management of risk
This presentation describes why return series are often 'fat tailed', strengths and weaknesses of (traditional) Extreme Value Theory (EVT) approaches and interaction with portfolio construction.
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Slides
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Applying EVT and alternatives to portfolio construction and the management of risk
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Using EVT and alternatives
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Modelling fat-tailed behaviour for individual risks
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Many (most?) investment return series are ‘fat-tailed’
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Why are return series often fat-tailed?
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Distributional mixtures of Normal distributions
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Explains some equity index fat fails, particularly upside
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And over longer time periods
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Crowded trades and leverage
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Extreme Value Theory (EVT)
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Restatement of EVT results
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Main result for block maxima
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Main result for excesses
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Potential weaknesses
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Using EVT and alternatives to Estimate VaRs
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Some subtleties of EVT
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Portfolio construction
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Portfolio construction - sensitivities
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Incorporating fat tails - Solution A - simplest
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Incorporating fat tails - Solution B - more sophisticated
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Summary
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Important Information
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