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

  • Kousky, Carolyn

    ()

    (Resources for the Future)

  • Cooke, Roger M.

    ()

    (Resources for the Future)

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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File URL: http://www.rff.org/RFF/documents/RFF-DP-09-36-REV.pdf
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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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  1. Carolyn Kousky & Erzo F.P. Luttmer & Richard J. Zeckhauser, 2006. "Private Investment and Government Protection," NBER Working Papers 12255, National Bureau of Economic Research, Inc.
  2. Neil A. Doherty & Harris Schlesinger, 2001. "Insurance Contracts and Securitization," CESifo Working Paper Series 559, CESifo Group Munich.
  3. 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.
  4. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  5. 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.
  6. 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.
  7. 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.
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