Tail Risk: heuristics, definitions, some new results

Mathematical Finance/Financial Engineering Seminar
Friday, February 18, 2011 - 15:05
1 hour (actually 50 minutes)
Skiles 002
Resources for the Future

Hosted by Christian Houdre and Liang Peng

"Tail risk" refers to an 'unholy trinity' Fat Tails, Micro Correlations, and Tail Dependence, that confound traditional risk analysis and are very much under-appreciated. The talk illustrates this with some punchy data. Of great interest is the question: when does aggregation amplify tail dependence? I'll show some data and new results. Tail obesity is not well defined mathematically, we have at least three definitions, leptokurtic, regularly varying and subexponential. A measure of tail obesity for finite data sets is proposed, and some theoretical properties explored.