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This presentation explores what we mean by 'extreme events' in the context of investment markets, what might cause these sorts of events, how they can be best analysed and catered for in portfolio construction and how to avoid being overconfident concerning them.

Slides

1	Views on non-Normal markets
2	Views on non-Normal markets
3	Agenda
4	Agenda
5	Extreme events and fat-tails
6	Examples of extreme events
7	How really extreme has 2007-09 been
8	Agenda
9	Visualising fat-tailed behaviour in individual return series
10	Example derivation of a quantile-quantile plot
11	Fat-tailed behaviour depends partly on timescale
12	More periods give more scope for extreme events
13	Skew(ness) and kurtosis
14	Interpretation via Cornish-Fisher asymptotic expansion
15	Flaws in Cornish Fisher (and hence in skew/kurtosis)
16	A better approach?
17	Agenda
18	What causes fat-tailed behavior?
19	Time-varying volatility
20	Explains some market index fat tails, particularly on upside
21	Not just a developed market phenomenon
22	A longer term phenomenon too
23	Time-varying volatility
24	Regime switching
25	Regime switching (continued)
26	Crowded trades
27	Leverage
28	Other examples of leverage
29	Impact that leverage can have on portfolio behaviour
30	Agenda
31	Fat tails and portfolio construction
32	Fat tails - in joint return series
33	Visualisation of joint fat-tailed behaviour
34	Quantile-quantile box plots
35	Distributional mixtures - again!
36	Principal components analysis (PCA)
37	Applying PCA to sector relatives
38	Adjusting for time-varying volatility in joint return series
39	Longitudinal time-varying volatility adjustment
40	Cross-sectional time-varying volatility adjustment
41	Back-testing time-varying volatility adjustments
42	Cross-sectional dispersion of pair-wise combinations
43	Impact of time-varying volatility adjustment
44	Agenda
45	Possible selection effects arising from active management
46	Implications for modelling
47	PCA vs. ICA
48	Including 'meaning' as well as 'noise'
49	Selection effects are potentially very important
50	Selection effects - Summary
51	Agenda
52	Portfolio construction
53	Portfolio construction - sensitivities
54	Portfolio construction - impact of fat tails (1)
55	Portfolio construction - impact of fat tails (2)
56	Other approaches - (1) distributional mixtures
57	Other approaches - (2) lower partial moments
58	Estimating lower partial moments
59	Views on non-Normal markets
60	Agenda
61	Appendix A: PCA vs. ICA - Noise vs. Explanation?
62	Independent components analysis
63	E.g. Non-Normality and Projection pursuit
64	Projection pursuit algorithm (1)
65	Projection pursuit algorithm (2)
66	Independent components analysis (ICA)
67	Blending together PCA and ICA
68	Identifying Principal Components one at a time
69	Blending together PCA and ICA
70	Appendix B: System-wide leverage effects
71	Does marking-to-market exacerbate leverage effects?
72	Systemic risk
73	How best to regulate firms?
74	Appendix C: Model risk and back-testing
75	Model assessment
76	Link with calibration
77	Ideally model should also fit well 'period by period'
78	Look-back bias and in-sample testing
79	Look-back bias and out-of-sample testing
80	Market consistent risk measurement
81	Back-testing in other regulatory frameworks
82	Appendix D: Stress Testing
83	Stress Testing - Additional drivers
84	Different meanings given to the term 'Stress Testing'
85	Reverse stress testing
86	Stress testing - other observations
87	Stress testing - statistical techniques
88	References
89	Important Information

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