Book description
Taking due account of extreme events when constructing portfolios of
assets or liabilities is a key discipline for market professionals.
Extreme events are a fact of life in how markets operate.
In Extreme Events: Robust Portfolio Construction in the Presence
of Fat Tails, leading expert Malcolm Kemp shows readers how to
analyse market data to uncover fat-tailed behaviour, how to
incorporate expert judgement in the handling of such information, and
how to refine portfolio construction methodologies to make portfolios
less vulnerable to extreme events or to benefit more from them.
This is the only text that combines a comprehensive treatment of
modern risk budgeting and portfolio construction techniques with the
specific refinements needed for them to handle extreme events. It
explains in a logical sequence what constitutes fat-tailed behaviour
and why it arises, how we can analyse such behaviour, at aggregate,
sector or instrument level, and how we can then take advantage of this analysis.
Along the way, it provides a rigorous, comprehensive and clear
development of traditional portfolio construction methodologies
applicable if fat-tails are absent. It then explains how to refine
these methodologies to accommodate real world behaviour.
Throughout, the book highlights the importance of expert opinion,
showing that even the most data-centric portfolio construction
approaches ultimately depend on practitioner assumptions about how the
world might behave.
The book includes:
- Key concepts and methods involved in analysing extreme events
- A comprehensive treatment of mean-variance investing, Bayesian
methods, market consistent approaches, risk budgeting, and their
application to manager and instrument selection
- A systematic development of the refinements needed to
traditional portfolio construction methodologies to cater for
fat-tailed behaviour
- Latest developments in stress testing and back testing methodologies
- A strong focus on the practical implementation challenges that
can arise at each step in the process and on how to overcome these challenges
“Understanding how to model and analyse the risk of extreme events
is a crucial part of the risk management process. This book provides
a set of techniques that allow practitioners to do this comprehensively.”
Paul Sweeting, Professor of Actuarial Science, University of Kent
“How can the likeliness of crises affect the construction of
portfolios? This question is highly topical in times where we still
have to digest the last financial collapse. Malcolm Kemp gives the
answer. His book is highly recommended to experts as well as to
students in the financial field.”
Christoph Krischanitz, President Actuarial Association of
Austria, Chairman WG “Market Consistency” of Groupe Consultatif
Malcolm Kemp (London, UK) is Founder and Managing
director of Nematrian Ltd, a consulting firm delivering services to
the quantitative finance and actuarial communities. Previously, he was
Director and Head of the Quantitative Research Team at Threadneedle
Asset Management, responsible for the derivative desk and its
portfolio risk measurement and management activities. He is a leading
expert on derivatives, performance measurement, risk measurement,
liability driven investment and other quantitative investment
techniques. Prior to this, Malcolm was a partner at Bacon &
Woodrow in their investment consultancy practice. He holds a first
class degree in Mathematics from Cambridge University and is also a
Fellow of the Institute of Actuaries. He is a regular on the
conference circuit, including Risk Europe and GARP events where he
speaks on a range of portfolio management and derivatives topics.
