Tail Dependence
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Transcript of Tail Dependence
Tail Dependence
Fat TailsMicro Correlations
Tail Dependence
“When sorrows come, they come…in battalions.”King Claudius, Hamlet Prince of Denmark, Act 4 Scene 5
Cooke and Kousky nsf# 0960865
http://www.rff.org/Events/Pages/Introduction-Climate-Change-Extreme-Events.aspx
Here’s what killed your 401(k)
Tail dependence: Correlations are in the High (or low) values
Two loss variablesindependent dependent (0.1) 401K killer
Copulaindependent dependent (0.1) 401K killer
Sums of 40 loss variables independent dependent 401K killer
Copula: sums of 40independent 401K killer
Sums of 40401K killer Tail dependent
Copula: sums of 40401K killer tail dependent
Copula: sums of 40401K killer tail dependent
Copula: sums of 40401K killer tail dependent
Tail dependence Bad things happen together
“ fatally flawed way to assess risk”
Tail Dependence:Ignore it at your 401K’s
peril
Fat TailsMicro Correlations
The Unholy Trinity:http://www.rff.org/Publications/Pages/PublicationDetails.aspx?PublicationID=20949