The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations
AbstractRecent 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 risks, and risks characterized by micro-correlations. A simple model of insurance demand and supply is used to illustrate the difficulties in insuring risks characterized by these phenomena. Policy implications are discussed.
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Bibliographic InfoPaper provided by Resources For the Future in its series Discussion Papers with number dp-09-36-rev.pdf.
Date of creation: 09 Nov 2009
Date of revision:
risk; fat tails; tail dependence; micro-correlations; insurance; natural disasters;
Find related papers by JEL classification:
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-16 (All new papers)
- NEP-ENE-2010-01-16 (Energy Economics)
- NEP-IAS-2010-01-16 (Insurance Economics)
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