tail dependence

Tail Dependence

Fat TailsMicro Correlations

Tail Dependence

“When sorrows come, they come…in battalions.”King Claudius, Hamlet Prince of Denmark, Act 4 Scene 5

Cooke and Kousky nsf# 0960865

http://www.rff.org/Events/Pages/Introduction-Climate-Change-Extreme-Events.aspx

Here’s what killed your 401(k)

Tail dependence: Correlations are in the High (or low) values

Two loss variablesindependent dependent (0.1) 401K killer

Copulaindependent dependent (0.1) 401K killer

Sums of 40 loss variables independent dependent 401K killer

Copula: sums of 40independent 401K killer

Sums of 40401K killer Tail dependent

Copula: sums of 40401K killer tail dependent

Copula: sums of 40401K killer tail dependent

Copula: sums of 40401K killer tail dependent

Tail dependence Bad things happen together

“ fatally flawed way to assess risk”

Tail Dependence:Ignore it at your 401K’s

peril

Fat TailsMicro Correlations

The Unholy Trinity:http://www.rff.org/Publications/Pages/PublicationDetails.aspx?PublicationID=20949