A Tale of Risk: Essays on Financial Extremes

PhD Thesis# 571
Author:
Kyle (K.T.) Moore
Supervisor(s):
Prof. C.G. de Vries, Dr. C. Zhou
Date:
2013-12-16

Abstract

There is every reason to believe that the level of turbulence we are presently experiencing is unprecedented in human development. Global political disorder, climatic irregularities, technological dissemination, and financial innovation have all contributed to, what some may ironically label, a new world order. In this new world, change is less likely to come in the form of small increment steps, but more probably the result of large, sharp adjustments. While predicting these adjustments is difficult, if not impossible, tools may be applied to determine the likelihood of such extreme events. In finance, the probability of extreme events is known as tail risk. In this thesis, tail risk is analyzed as it relates to stock returns and to problems concerning systemic events in the banking industry. In order to model tail risk, it is assumed that changes in the price of financial instruments exhibit a heavy-tail property. While this has been observed and recognized for at least a half century, it is only recently that academics and practitioners have started to see the imperative of including this property in their theoretical and practical models. Yet, a greater understanding of how the characteristics of the heavy-tailed distribution relate to financial asset returns is still required.

Publisher of the TI-theses is: Rozenberg Publishing Services