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Fat Tails and Extreme Events - A presentation on Malcolm Kemp's book "Extreme Events: Robust Portfolio Construction in the Presence of Fat Tails"
This presentation summarises material in the author's book 'Extreme Events: Robust Portfolio Construction in the Presence of Fat Tails'. Chapter titles include:
1. Introduction
2. Fat tails – in single (i.e. univariate) return series
3. Fat tails – in joint (i.e. multivariate) return series
4. Identifying factors that significantly influence markets
5. Traditional portfolio construction techniques
6. Robust mean-variance portfolio construction
7. Regime switching and time-varying risk and return parameters
8. Stress testing
9. Really extreme events
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Slides
1
Asset Allocation Workshop
2
Underlying thesis
3
Extreme Events: Robust Portfolio Construction in the Presence of Fat Tails
4
Selected highlights from “Extreme Events”
5
Modelling fat tails for individual risks
6
Many (most?) investment return series are ‘fat-tailed’
7
Why are return series often fat-tailed?
8
Explains some equity index fat fails, particularly upside
9
And over longer time periods
10
Crowded trades and leverage
11
Extreme Value Theory (EVT)
12
Potential weaknesses
13
Selected highlights from “Extreme Events”
14
Joint fat-tailed behaviour
15
Copulas: a well trodden (mathematical) path
16
But extreme behaviour shows up better in QQ plots
17
Selected highlights from “Extreme Events”
18
Factor identification
19
Fundamental data limitations
20
Selection effects
21
PCA vs. ICA
22
Selection effects are potentially very important
23
Selection effects: do they occur in practice?
24
Selected highlights from “Extreme Events”
25
Portfolio construction
26
Portfolio construction: sensitivities
27
Impact of fat tails (1)
28
Impact of fat tails (2)
29
Other approaches
30
Selected highlights from “Extreme Events”
31
Stress testing
32
Observations
33
Really extreme events
34
Extreme Events: Robust Portfolio Construction in the Presence of Fat Tails
35
Important Information
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