Thu, Jan 29, 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. Investing - U.S. investors favor currency hedged Europe ETFs as euro tumbles, Quants win back investors as Swiss franc fuels volatility gains, David Einhorn's $7bn hedge fund is loading up on this stock, Hedge fund BlueMountain Capital unveils Ocwen Financial short, claims default on notes[more]

    U.S. investors favor currency hedged Europe ETFs as euro tumbles From Reuters.com: U.S. investors stung by the falling euro who want to stay invested in Europe are turning to exchange-traded funds designed to strip out the impact of the region's currency. The biggest among so-called "cur

  2. News Briefs - Millennials use tech tools to jump into investing, Winklevoss twins to launch bitcoin exchange with FDIC insured deposits, Robertson’s legacy from hedge funds to New Zealand, Real estate managers exploring smaller open-end funds[more]

    Millennials use tech tools to jump into investing It is the Facebookification of monetary investing. From social networking platforms that enable young investors to stick to every other's stock-picking mojo, to internet sites for initially-timers hungry for a piece of the Silicon Valley

  3. Opalesque Exclusive: Ex-Citi trader launches 'sleep-at-night’ long/short equity fund[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: After working at Citi's proprietary trading desk, managing a large portfolio between 2008 and 2011, Joel S. Salomon founded SalauMor Management in New York

  4. …And Finally - Prison restaurant is the best in Cardiff[more]

    From Orange.co.uk: A restaurant at a prison staffed entirely by inmates has been ranked as the best in Cardiff by diners. The Clink Restaurant at HMP Cardiff - which is open to the public - has been ranked number one on TripAdvisor out of 946 eateries in the Welsh capital. Diners who pos

  5. Update: Prosecutors seek 12 years for hedge fund manager Francisco Illarramendi[more]

    Komfie Manalo, Opalesque Asia: Federal prosecutors have asked the court to sentence convicted hedge fund manager Francisco Illarramendi to 12 years imprisonment for running an elaborate Ponzi scheme that bilked investors hundreds of millions in dollars, including a Venezuelan pension fund, report