Extreme Events and Portfolio Construction [22]

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Bullet points include: However, copulas are rather complicated mathematically. Typically, simpler correlation based aggregation techniques are used instead (technically involves use of a Gaussian copula). Maybe with adjusted (i.e. higher) correlations if focus is on tail events, to cater for non-zero tail dependencies. In a portfolio construction context generally involves a factor-based model of the world. Vastly reduces number of parameters that need estimating (if large universe). An entire risk model vendor industry focuses on creating and utilising such models

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