Extreme Events and Portfolio Construction [7]

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Bullet points include: As noted above, some instruments have intrinsically skewed behaviour. More generally, an important source of fat-tailed behaviour is the time-varying nature of the world in which we live. Market / sector / instrument volatilities (and maybe other distributional characteristics) change through time. Other sources include crowded trades, leverage and other selection effects such as manager behaviour being (consciously or unconsciously) biased towards strategies that are prone to fat-tailed behaviour

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