Fri, Nov 28, 2014
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. Unlucky Paulson & Co. rebrands $1.6bn Recovery Fund after 13% drop[more]

    From Businessweek.com: A maturing U.S. economic recovery is prompting Paulson & Co. to change course. The $19 billion hedge fund firm, led by billionaire John Paulson, told investors on a conference call this month that the Paulson Recovery Fund will be renamed Paulson Special Situations Fund on Jan

  2. Opalesque Roundtable: Islamic Finance races ahead with Sukuk, the first managed account platform, and foreign demand[more]

    Komfie Manalo, Opalesque Asia: A number of developments took place within Islamic finance in the past years, including the launch of a Islamic managed account platform and the further growth of the sukuk space that saw this instrument evolve from being a type of an ABS security that was rarely

  3. CTAs , event-driven strategies lead hedge funds recovery in mid-November[more]

    Komfie Manalo, Opalesque Asia: November’s performance proves to be in sharp contrast to the previous month, with equities further consolidating their upswing last week, according to the latest Lyxor Asset Management’s Weekly Brief. CTA funds als

  4. Fund Profile - A complex hedge fund strategy works for United Technologies[more]

    From Institutionalinvestor.com: Reports that portable alpha is dead have been greatly exaggerated, as Mark Twain might have phrased it. Another Connecticut Yankee, giant United Technologies Corp., is gearing up to grow its successful, nearly decade-long portable-alpha program. The UTC strategy took

  5. Opalesque Exclusive: The unintended consequences of Basel III[more]

    Benedicte Gravrand, Opalesque Geneva: Bijesh Amin, co-founder and managing director of Indus Valley Partners (IVP), a technology solutions and services firm focused on the alternative asset management industry, has recently observed