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Pages on this website that contain links to this reference include ConstrainedQuadraticOptimisation2, ConstrainedQuadraticOptimisationRefs, ERMForPensionFundsRefs, ERMGlossaryKnightianUncertainty, ExtremeEvents, IndependentComponentsAnalysis4b, IndependentComponentsAnalysis4c, IndependentComponentsAnalysisRefs, QuantFinanceIntro, ResampledOptimisation and SystemicRiskReferences5

Kemp, M.H.D. (2010)Extreme Events. Robust Portfolio Construction in the Presence of Fat Tailshere

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Short description from book cover

"Taking due account of extreme events when constructing portfolios of assets or liabilities is a key discipline for market professionals. Extreme events are a fact of life in how markets operate.

In Extreme Events: Robust Portfolio Construction in the Presence of Fat Tails, leading expert Malcolm Kemp shows readers how to analyse market data to uncover fat-tailed behaviour, how to incorporate expert judgement in the handling of such information, and how to refine portfolio construction methodologies to make portfolios less vulnerable to extreme events or to benefit more from them.

This is the only text that combines a comprehensive treatment of modern risk budgeting and portfolio construction techniques with the specific refinements needed for them to handle extreme events. It explains in a logical sequence what constitutes fat-tailed behaviour and why it arises, how we can analyse such behaviour, at aggregate, sector or instrument level, and how we can then take advantage of this analysis.

Along the way, it provides a rigorous, comprehensive and clear development of traditional portfolio construction methodologies applicable if fat tails are absent. It then explains how to refine these methodologies to accommodate real world behaviour, i.e. behaviour that includes extreme events from time to time.

Throughout, the book highlights the importance of expert opinion, showing that even the most data-centric portfolio construction approaches ultimately depend on practitioner assumptions about how the world might behave. Material in the book of particular value to practitioners, researchers and students includes:

(a) Key concepts and methods involved in analysing extreme events;

(b) A comprehensive treatment of mean-variance investing, Bayesian methods, market consistent approaches, risk budgeting, and their application to manager and instrument selection;

(c) A systematic development of the refinements needed to traditional portfolio construction methodologies to cater for fat-tailed behaviour;

(d) Latest developments in stress testing and backtesting methodologies; and

(e) A strong focus on the practical implementation challenges that can arise at each step in the process and on how to overcome these challenges."

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