Thu, Nov 26, 2015
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. Other Voices: Hedge fund marketing and the selling cycle[more]

    By Bruce Frumerman. How long is the selling cycle now? That’s a question my financial communications and sales marketing consulting firm has been asked on a regular basis by hedge fund firm owners and sales people, ever since we opened the doors to our firm in 1987 pre-crash. Wa

  2. Investing - BlackRock targets ETF investors with flexible currency hedging, Nelson Peltz bets on General Electric Company and Mondelez International, Apple plummets to 4th place among hedge holdings, from No. 1, Top Q3 equity purchases and sales of top 50 hedge funds[more]

    BlackRock targets ETF investors with flexible currency hedging From BlackRock Inc., the world’s largest asset manager, is changing course on exchange-traded funds that protect against currency volatility. After stressing the easy switch between hedged and unhedged ET

  3. BlackRock is shutting down its Global Ascent macro fund[more]

    Komfie Manalo, Opalesque Asia: BlackRock, the world’s largest asset manager, has announced plans to shut down a macro fund, Global Ascent Fund, because of "headwinds facing the industry". The hedge fund, which makes bets on stock, bond and currency markets, will return money to investors. Ac

  4. Opalesque Roundtable: Seeding deal terms can be onerous for hedge funds[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: Executives from fund of funds firms, family offices, a placement agent, a private equity firm, and an accounting firm gathered in Connecticut last month for the

  5. Opalesque Roundtable: Family offices flock to co-investment[more]

    Bailey McCann, Opalesque New York: Co-investments have been a hot topic for pension funds in recent years, as they try to move away from high fees and improve transparency. But now, family offices are more readily getting into the mix and establishing in-house deal teams, according to the delega