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Risk aggregation and Extreme Events [79]

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Bullet points include: ‘Selection’ effects are a common problem in finance E.g. Individuals buying annuities typically have longer life expectancies than individuals who don’t Can also apply to portfolios being analysed by risk models Many risk models assume behaviour that is (approximately) Gaussian, i.e. multivariate (log) Normal, akin to lots of different sources of random noise Can decompose multiple series return data into ‘principal components’, the most important of which contribute the most to the aggregate variabilities exhibited by securities in the relevant universe But what if portfolios are structured to seek ‘meaning’ (e.g. if they are actively managed!) and ‘meaning’ is (partly) associated with non-Normality?

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