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Fat-Tailed and Skewed Asset Return Distributions: Implications for Risk Management, Portfolio Selection, and Option Pricing

Fat-Tailed and Skewed Asset Return Distributions: Implications for Risk Management, Portfolio Selection, and Option Pricing

Svetlozar T. Rachev, Christian Menn, Frank J. Fabozzi

ISBN: 978-0-471-75890-7

Sep 2005

369 pages



While mainstream financial theories and applications assume that asset returns are normally distributed, overwhelming empirical evidence shows otherwise. Yet many professionals don’t appreciate the highly statistical models that take this empirical evidence into consideration. Fat-Tailed and Skewed Asset Return Distributions examines this dilemma and offers readers a less technical look at how portfolio selection, risk management, and option pricing modeling should and can be undertaken when the assumption of a non-normal distribution for asset returns is violated. Topics covered in this comprehensive book include an extensive discussion of probability distributions, estimating probability distributions, portfolio selection, alternative risk measures, and much more. Fat-Tailed and Skewed Asset Return Distributions provides a bridge between the highly technical theory of statistical distributional analysis, stochastic processes, and econometrics of financial returns and real-world risk management and investments.

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About the Authors.

Chapter 1: Introduction.

PART ONE: Probability and Statistics.

Chapter 2: Discrete Probability Distributions.

Chapter 3: Continuous Probability Distributions.

Chapter 4: Describing a Probability Distribution Function: Statistical Moments and Quantiles.

Chapter 5: Joint Probability Distributions.

Chapter 6: Copulas.

Chapter 7: Stable Distributions.

Chapter 8: Estimation Methodologies.

PART TWO: Stochastic Processes.

Chapter 9: Stochastic Processes in Discrete Time and Time Series Analysis.

Chapter 10: Stochastic Processes in Continuous Time.

PART THREE: Portfolio Selection.

Chapter 11: Equity and Bond Return Distributions.

Chapter 12: Risk Measures and Portfolio Selection.

Chapter 13: Risk Measures in Portfolio Optimization and Performance Measures.

PART FOUR: Risk Management.

Chapter 14: Market Risk.

Chapter 15: Credit Risk.

Chapter 16: Operational Risk.

PART FIVE: Option Pricing.

Chapter 17: Introduction to Option Pricing and the Binomial Model.

Chapter 18: Black-Scholes Option Pricing Model.

Chapter 19: Extension of the Black-Scholes Model and Alternative Approaches.