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

Carolyn Kousky; Roger M Cooke

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

Carolyn Kousky, Roger M Cooke

Management Science

Research output: Working paper › Discussion paper

12 Citations (Scopus)

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.

Original language	English
Place of Publication	Washington, DC
Pages	1-36
Number of pages	36
Publication status	Published - 2009

Keywords

risk management
dependent risk
catastrophic risk
risk management strategies

Cite this

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AB - 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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KW - catastrophic risk

KW - risk management strategies

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ER -

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

Abstract

Keywords

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