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

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  • Kousky, Carolyn

    ()
    (Resources for the Future)

  • Cooke, Roger M.

    ()
    (Resources for the Future)

Abstract

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 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 Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-09-36-rev.pdf.

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Date of creation: 09 Nov 2009
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Handle: RePEc:rff:dpaper:dp-09-36-rev.pdf

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Keywords: risk; fat tails; tail dependence; micro-correlations; insurance; natural disasters;

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References

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  1. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
  2. Kousky, Carolyn & Cooke, Roger, 2009. "Climate Change and Risk Management: Challenges for Insurance, Adaptation, and Loss Estimation," Discussion Papers dp-09-03-rev, Resources For the Future.
  3. Neil A. Doherty & Harris Schlesinger, 2001. "Insurance Contracts and Securitization," CESifo Working Paper Series 559, CESifo Group Munich.
  4. Erwann Michel-Kerjan & Frederic Morlaye, 2008. "Extreme Events, Global Warming, and Insurance-Linked Securities: How to Trigger the “Tipping Point”," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 33(1), pages 153-176, January.
  5. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  6. Kousky, Carolyn & Luttmer, Erzo F. P. & Zeckhauser, Richard, 2006. "Private Investment and Government Protection," Working Paper Series rwp06-017, Harvard University, John F. Kennedy School of Government.
  7. Ladoucette, Sophie A. & Teugels, Jef L., 2006. "Analysis of risk measures for reinsurance layers," Insurance: Mathematics and Economics, Elsevier, vol. 38(3), pages 630-639, June.
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Cited by:
  1. Benjamin Jones & Michael Keen & Jon Strand, 2013. "Fiscal implications of climate change," International Tax and Public Finance, Springer, vol. 20(1), pages 29-70, February.
  2. Gernot Wagner & Richard Zeckhauser, 2012. "Climate policy: hard problem, soft thinking," Climatic Change, Springer, vol. 110(3), pages 507-521, February.
  3. Clovis Freire, . "Social and Economic Impact of Disasters: Estimating the Threshold between Low and High Levels of Risk," MPDD Working Paper Series WP/11/15, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
  4. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Livestock Gross Margin Insurance for Dairy: Designing Margin Insurance Contracts to Account for Tail Dependence Risk," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124718, Agricultural and Applied Economics Association.

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