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Extreme events - A Summary [17]

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Bullet points include: Selection’ effects are common in finance, e.g. annuitants typically have higher than average life expectancies. 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 variability exhibited by securities in the relevant universe. But what if portfolios are structured to seek ‘meaning’ (e.g. if actively managed!) and ‘meaning’ is (partly) associated with non-Normality? Both meaning and magnitude are important

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