Tue, May 26, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Alternative Market Briefing

Other Voices: Modified Volatility - 1937 paper found relevant to today's risk management challenges

Wednesday, August 12, 2009

By Peter Urbani, CIO, Infiniti Capital:

An obscure tract by a University of Adelaide Statistics Professor, Edmund Cornish is today among the leading candidates for improving risk management.

The 1937 paper by Edmund Alfred Cornish (1909 - 1973) and Sir Ronald Fisher* provides the basis for the Cornish-Fisher expansion by which the impact of higher statistical moments such as skewness and kurtosis (3rd and 4th statistical moments) can be added to the normal distribution.

This is important in the measurement of risk because these higher moments are primarily what is responsible for the so called 'fat tails' of returns. These cause large losses to be both more frequent and more severe than predicted by the normal distribution which considers only the first two moments (Mean and Standard Deviation). The Gaussian or Normal distribution underpins all of probability theory and the 'assumption of normality' is deeply embedded in most finance theory including option pricing models and the widely used Value at Risk (VaR) metric by which banks determine how much capital they need to hold in reserve against potential losses.

As we have seen from the recent credit crisis and a spate of bank failures in the US and elsewhere (72 US banks have failed so far this year), most banks were not holding sufficient capital to cover their losses in the recent crisis. In fact it has been estimated that in aggregate they were holding only half as much in reserve as they actu......................

To view our full article Click here

Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Comment - Top hedge fund managers talk about how easy their jobs have gotten, BlackRock to Schroders warn of Argentina’s $20bn bond glut, The 35-year “investment supercycle” is drawing to a close, says Bill Gross, Gundlach: When the Fed starts hiking rates, 'GET OUT' of this asset class[more]

    Top hedge fund managers talk about how easy their jobs have gotten From Businessinsider.com.au: Time was, before the financial crisis hit, corporate boards treated multi-billion dollar hedge fund managers like Jehovah’s Witnesses pounding on their doors and flashing bibles. But no more.

  2. T Rowe's challenge to Dell deal may fuel critics of 'appraisal'[more]

    From Reuters.com: An increasingly popular tactic used by hedge funds and others to extract more money from buyouts could soon face a major courtroom test when a big investor in Dell Inc may argue that it should be paid a higher price for the 2013 acquisition of the PC maker. The strategy, known as "

  3. News Briefs - Ergen says LightSquared plan unfairly favors hedge funds, Why hedge fund managers make good advisory clients, I learned a lot about dad-bros after spending 4 days in Vegas with 2,000 hedge funders[more]

    Ergen says LightSquared plan unfairly favors hedge funds LightSquared Inc.’s bankruptcy plan gives hedge funds that invested in the broadband company a leg up while blocking telecommunications firms from competing with it, a fund owned by Dish Network Corp. Chairman Charles Ergen said in

  4. Opalesque Exclusive: SEC approves proposed changes to Form ADV, '40 Act - comment period to follow[more]

    Bailey McCann, Opalesque New York: Hedge funds and providers of liquid alternatives will want to pay close attention to proposed reforms approved by the SEC yesterday. The changes will require more frequent reporting, as well as a closer look into social media, liquid alternative strategies, and

  5. Opalesque Exclusive: Ovation Partners targets opportunities where few "natural lenders" participate[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: Changes in financial regulations post-2008 (Dodd-Frank and Basel III) are forcing banks to significantly alter their core lending businesses. And as mid-sized

 

banner