Fat Tails and Extreme Events [10]

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Bullet points include: Some fat tails still seem to come “out of the blue”. E.g. Quant funds in August 2007. Too many investors in the same crowded trades? Behavioural finance implies potentially unstable. For less liquid investments, impact may be via an apparent shift in price basis. System-wide equivalents via leverage? Leverage introduces/magnifies liquidity risk, forced unwind risk and variable borrow cost risk. Like selection, involves behavioural finance effects

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