Bounding heavy-tailed return distributions to measure model risk

Details Bounding heavy-tailed return distributions to measure model risk Bounding heavy-tailed return distributions to measure model risk

2011-09-13

arxiv.org/abs/1109.2803v1

Economy

Quantitative Finance

Risk Management

Scientific paper

This article makes use of the apparent indifference that the market has been devoting to the developments made on the fundamentals of quantitative finance, to introduce novel insight for better understanding market evolution.We show how these drops and crises emerge as a natural result of local economical principles ruling trades between economical agents and present evidence that heavy-tails of the return distributions are bounded by constraints associated with the topology of agent relations. Finally, we discuss how these constraints may be helpful for properly evaluate model risk.

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