Kurtosis risk
In
risk that results when a statistical model assumes the normal distribution, but is applied to observations
that have a tendency to occasionally be much farther (in terms of number of standard deviations) from the average than is expected for a normal distribution.
Overview
fat tail
" risk. The "fat tail" metaphor explicitly describes the situation of having more observations at either extreme than the tails of the normal distribution would suggest; therefore, the tails are "fatter".
Ignoring kurtosis risk will cause any model to understate the risk of variables with high kurtosis. For instance, Long-Term Capital Management, a hedge fund cofounded by Myron Scholes, ignored kurtosis risk to its detriment. After four successful years, this hedge fund had to be bailed out by major investment banks in the late 1990s because it understated the kurtosis of many financial securities underlying the fund's own trading positions.[1][2]
Research by Mandelbrot
Black–Scholes option model developed by Myron Scholes and Fischer Black, and the capital asset pricing model developed by William F. Sharpe
. Mandelbrot explained his views and alternative finance theory in his book: The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward published on September 18, 1997.
See also
- Kurtosis
- Skewness risk
- Stochastic volatility
- Holy grail distribution
- Taleb distribution
- The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb
Notes
- Slate Magazine. Retrieved 2008-05-16.
- ^ "Bailout of Long-Term Capital: A Bad Precedent?". The New York Times. December 26, 2008.
- S2CID 199678533.
References
- ISBN 0-465-04355-0.
- Premaratne, G., Bera, A. K. (2000). Modeling Asymmetry and Excess Kurtosis in Stock Return Data. Office of Research Working Paper Number 00-0123, University of Illinois