The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations

The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations

Recent events in the financial and insurance markets, as well as the looming challenges of a globally changing climate point to the need to re-think the ways in which we measure and manage catastrophic and dependent risks. Management can only be as good as our measurement tools. To that end, this paper outlines detection, measurement, and analysis strategies for fat-tailed risks, tail dependent...

The Limits of Securitization on a Hot, Flat Planet1 Micro-correlations, Fat Tails and Tail Dependence

Aggregation is a key feature of traditional risk management strategies. Financial institutions securitize assets and property insurers hold bundles of policies across many lines of business. With independent assets and risks with thin tails, the law of large numbers (LLN) and the central limit theorem (CLT) assure risk benefits from aggregation: the standard deviation of the sum increases slowe...

Supervenience, Emergence, and Epiphenomenalism: Physicalism’s Unholy Trinity

Correlations have fat tails, too

The investment community is, by now, familiar with the idea of fat tails. The concept moved beyond the domain of actuaries and quant geeks with Nassim Nicholas Taleb’s book The Black Swan (2007). Taleb drove home the point that volatility does not tell the whole story of the uncertainty associated with asset returns. In particular, extreme outcomes occur more frequently (i.e., tails are fatter)...

The unholy trinity: taxonomy, species delimitation and DNA barcoding.

Recent excitement over the development of an initiative to generate DNA sequences for all named species on the planet has in our opinion generated two major areas of contention as to how this 'DNA barcoding' initiative should proceed. It is critical that these two issues are clarified and resolved, before the use of DNA as a tool for taxonomy and species delimitation can be universalized. The f...