Extreme Events (PDF)

Taking due account of extreme events when constructing portfolios
of assets or liabilities is a key discipline for market
professionals. Extreme events are a fact of life in how markets
operate.

In Extreme Events: Robust Portfolio Construction in the
Presence of Fat Tails, leading expert Malcolm Kemp shows
readers how to analyse market data to uncover fat-tailed behaviour,
how to incorporate expert judgement in the handling of such
information, and how to refine portfolio construction methodologies
to make portfolios less vulnerable to extreme events or to benefit
more from them.

This is the only text that combines a comprehensive treatment of
modern risk budgeting and portfolio construction techniques with
the specific refinements needed for them to handle extreme events.
It explains in a logical sequence what constitutes fat-tailed
behaviour and why it arises, how we can analyse such behaviour, at
aggregate, sector or instrument level, and how we can then take
advantage of this analysis.

Along the way, it provides a rigorous, comprehensive and clear
development of traditional portfolio construction methodologies
applicable if fat-tails are absent. It then explains how to refine
these methodologies to accommodate real world behaviour.

Throughout, the book highlights the importance of expert
opinion, showing that even the most data-centric portfolio
construction approaches ultimately depend on practitioner
assumptions about how the world might behave.

The book includes:

* Key concepts and methods involved in analysing extreme
events

* A comprehensive treatment of mean-variance investing, Bayesian
methods, market consistent approaches, risk budgeting, and their
application to manager and instrument selection

* A systematic development of the refinements needed to
traditional portfolio construction methodologies to cater for
fat-tailed behaviour

* Latest developments in stress testing and back testing
methodologies

* A strong focus on the practical implementation challenges that
can arise at each step in the process and on how to overcome these
challenges

"Understanding how to model and analyse the risk of
extreme events is a crucial part of the risk management process.
This book provides a set of techniques that allow practitioners to
do this comprehensively."

Paul Sweeting, Professor of Actuarial Science, University of
Kent

"How can the likeliness of crises affect the
construction of portfolios? This question is highly topical in
times where we still have to digest the last financial collapse.
Malcolm Kemp gives the answer. His book is highly recommended to
experts as well as to students in the financial
field."

Christoph Krischanitz, President Actuarial Association of Austria,
Chairman WG "Market Consistency" of Groupe
Consultatif