heavy tailed and stable distributions in financial econometrics

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1、c14-HeavyTailedPage465Thursday,October26,20062:11PMCHAPTER14Heavy-TailedandStableDistributionsinFinancialEconometricsnAugustof1992,powerfulhurricaneAndrewravagedthroughsouth-IernFloridaandLouisiana,creatinginsuredlossesexceeding$16billionandtotallosseso

2、fmorethan$30billion.Thissingleeventforcedseveralinsurancecompaniestobankruptcyandsignificantlydepletedtheinsur-ancecapitalavailablefornaturalcatastrophes.InSeptember1998,thesuddenriseofvolatilityintheglobalfinancialmarkets,setoffbyadefaultinRussia’ssovere

3、igndebt,ledtothehedgefund1Long-TermCapitalManagement(LTCM)incurringlossesinexcessof90%ofitsvalue.LTCMwashighlyleveraged,meaningithadmorethan$125bil-lionofborrowedfunds.Thisfinancialmishapcausedaserioustreattothestabilityoftheglobalfinancialsystemandamorew

4、idespreadcol-lapseinthefinancialmarketswasonlyavoidedbya$3.6billionbailoutorganizedbytheFederalReserveBoardoftheNewYork.Aconsequenceofthiseventisthatitexposedthevulnerabilityoffinancialmarketstodealingsofhedgefunds.Whatdonaturalcatastrophessuchashurricane

5、Andrewhaveincommonwithmarketcrashesandwhataretheimplica-tionsoftheseevents?Althoughthefirstonerelatestonaturalphenom-enaandthesecondonetosocioeconomicphenomena,bothoftheseeventssharethepropertythatlawsthatgovernextremeeventsmayvio-1Thistermdenotesafundwh

6、osemanagersreceiveperformance-relatedfeesandcanfreelyusevariousactiveinvestmentstrategiestoachievepositiveabsolutereturns,in-volvinganycombinationofleverage,derivatives,longandshortpositionsinsecuri-tiesoranyotherassetsinawiderangeofmarkets.Hedgefundsar

7、ecurrentlynotregulatedbutmonitoringoftheiractivitiesisincreasing.Theterms“pooledinvest-mentvehicle”and“sophisticatedalternativeinvestmentvehicles”areusedinter-changeably.465c14-HeavyTailedPage466Thursday,October26,20062:11PM466FINANCIALECONOMETRICSlatet

8、heassumptionsonwhichthecurrentprevailingassessmentofinsur-ancelossesduetoextremeweathereventsandriskmanagementpracticesinfinancialmarketsarebuiltupon.Forthehurricaneevent,theexpertcommissionthatreviewedthesituationconcludedthat“th