Extreme Events and Portfolio Construction [20]

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Bullet points include: Crucial to the portfolio construction problem. Can split the probability distribution into two components: Marginals (i.e. distributions of each individual risk in isolation); and Copula (i.e. the remainder, the ‘co-dependency’ between risks). However. Fat-tailed characteristics then difficult to visualise. Copulas are akin to (indeed are) cumulative distribution functions. Many problems depend on a) and b) in tandem

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