Extreme Events and Portfolio Construction [30]

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Bullet points include: Why are return series often ‘fat tailed’? Time-varying world in which we live. Behavioural dynamics including crowded trades and ‘selection’ effects. Extreme Value Theory (EVT) and possible refinements. Extrapolation is inherently challenging, although tail weighted MLE (perhaps adjusted to allow for time varying volatility?) might help. Modelling joint fat-tailed behaviour. Implications of the ‘fine structure’ problem. Lessons for portfolio construction. Material departure from mean-variance ‘norm’ rapidly increases complexity. Problem becomes more sensitive to nature of utility function

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