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Fat Tails and Extreme Events [33]

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Bullet points include: We need to promote the right mind-set as there is insufficient data to allow rigorous mathematical analysis. Think outside the box (c.f. reverse stress testing). Accept that (Knightian) uncertainty is a fact of life. But bear in mind that market behaviour can inform us about how markets react to intrinsic uncertainty and that there is typically a premium for flexibility. Be particularly aware of exposures that are sensitive to aggregate ‘market risk appetite’, including liquidity risk and other selection-sensitive risk types. Don’t undervalue good governance and operational management (including ERM principles). Remember markets are driven in part by (hard to quantify) behavioural factors

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