Extreme Events and Portfolio Construction [11]

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Bullet points include: However, time-varying volatility does not explain all fat-tailed behaviour. Some fat tails still seem to come “out of the blue”. E.g. Quant funds in August 2007 (marking the ‘start’ of the 2007-09 Credit Crisis?). Too many investors in the same crowded trades? System-wide equivalents via leverage? Leverage introduces/magnifies liquidity risk, forced unwind risk and variable borrow cost risk. May show up in an apparent shift in price basis. Both involve behavioural finance effects

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