Extreme events: Robust Portfolio Construction in the Presence of Fat Tails - A Summary
This presentation explores the analysis of fat-tailed behaviour, what causes fat-tailed behaviour (including time-variation, crowded trades and selection effects) and portfolio construction in the presence of fat tails. It is based on material in the author’s book ‘Extreme Events: Robust Portfolio Construction in the Presence of Fat Tails’.
Extreme Events: Robust Portfolio Construction in the Presence of Fat Tails
Analysing fat-tailed behaviour
Skew(ness), kurtosis and Cornish Fisher
Joint fat-tailed behaviour
What causes fat-tailed behaviour?
Explains some market index fat tails, particularly on upside
A longer term phenomenon too
Crowded trades and selection effects
Portfolio construction - sensitivities
Incorporating fat tails - Solution A - simplest
Incorporating fat tails - Solution B - more sophisticated
Appendix A: Flaws in Cornish Fisher (and skew/kurtosis
Appendix B: Selection effects
Selection effects are potentially very important
Selection - does it occur in practice?
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