Taking due account of extreme events when constructing portfoliosof assets or liabilities is a key discipline for marketprofessionals. Extreme events are a fact of life in how marketsoperate.
In Extreme Events: Robust Portfolio Construction in thePresence of Fat Tails, leading expert Malcolm Kemp showsreaders how to analyse market data to uncover fat-tailed behaviour,how to incorporate expert judgement in the handling of suchinformation, and how to refine portfolio construction methodologiesto make portfolios less vulnerable to extreme events or to benefitmore from them.
This is the only text that combines a comprehensive treatment ofmodern risk budgeting and portfolio construction techniques withthe specific refinements needed for them to handle extreme events.It explains in a logical sequence what constitutes fat-tailedbehaviour and why it arises, how we can analyse such behaviour, ataggregate, sector or instrument level, and how we can then takeadvantage of this analysis.
Along the way, it provides a rigorous, comprehensive and cleardevelopment of traditional portfolio construction methodologiesapplicable if fat-tails are absent. It then explains how to refinethese methodologies to accommodate real world behaviour.
Throughout, the book highlights the importance of expertopinion, showing that even the most data-centric portfolioconstruction approaches ultimately depend on practitionerassumptions about how the world might behave.
The book includes:
* Key concepts and methods involved in analysing extremeevents
* A comprehensive treatment of mean-variance investing, Bayesianmethods, market consistent approaches, risk budgeting, and theirapplication to manager and instrument selection
* A systematic development of the refinements needed totraditional portfolio construction methodologies to cater forfat-tailed behaviour
* Latest developments in stress testing and back testingmethodologies
* A strong focus on the practical implementation challenges thatcan arise at each step in the process and on how to overcome thesechallenges
"Understanding how to model and analyse the risk ofextreme events is a crucial part of the risk management process.This book provides a set of techniques that allow practitioners todo this comprehensively."
Paul Sweeting, Professor of Actuarial Science, University ofKent
"How can the likeliness of crises affect theconstruction of portfolios? This question is highly topical intimes where we still have to digest the last financial collapse.Malcolm Kemp gives the answer. His book is highly recommended toexperts as well as to students in the financialfield."
Christoph Krischanitz, President Actuarial Association of Austria,Chairman WG "Market Consistency" of GroupeConsultatif