Tuesday, July 20, 2010

Risk Management, Kurtosis, Skewness & Extreme Value Theory

My article at SeekingAlpha.com was published as a full-fledged article - and I am now an official "Contributor" at their website. Someone asked a few good questions that I answered on the website. I also copied it below, since I thought it was good information.

More realistic estimate of probabilities: I like semi-deviation as an easy-to-explain measure (volatility and risk to the downside). Additional measures that help describe return distributions -- would involve calculating additional "moments" such as skewness and kurtosis (the fat-tailed distributions that many investment strategists strive for = minimize losses, fattening profits).

More on Semi-Correlation: Semi-correlation is somewhat similar to correlation, except it studies periods where certain assets decline. This can give a "true" measure of diversification during financial crises.

There is also a branch of statistics that studies the probability of big dislocations such as crashes in markets (Extreme Value Theory) - which is very interesting...

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