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Fat-Tailed and Skewed Asset Return Distributions: Implications for Risk Management, Portfolio Selection, and Option Pricing [Hardcover]

Svetlozar T. Rachev , Christian Menn , Frank J. Fabozzi

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Book Description

Aug. 5 2005 0471718866 978-0471718864 1
While mainstream financial theories and applications assume that asset returns are normally distributed, overwhelming empirical evidence shows otherwise. Yet many professionals don’t appreciate the highly statistical models that take this empirical evidence into consideration. Fat-Tailed and Skewed Asset Return Distributions examines this dilemma and offers readers a less technical look at how portfolio selection, risk management, and option pricing modeling should and can be undertaken when the assumption of a non-normal distribution for asset returns is violated. Topics covered in this comprehensive book include an extensive discussion of probability distributions, estimating probability distributions, portfolio selection, alternative risk measures, and much more. Fat-Tailed and Skewed Asset Return Distributions provides a bridge between the highly technical theory of statistical distributional analysis, stochastic processes, and econometrics of financial returns and real-world risk management and investments.

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Review

"On the whole a valuable attempt to continue the work of Mandlebrot and others, to break the habit of treating the normal distribution curve as. . . normal." -- HedgeWorld News

"This book is well-written by knowledgeable authors and provides readers with an excellent overview of where fat-tailed or skewed distributions may be needed. The book unfolds in a clear and easy-to-read way, and I would definitely recommend this as an excellent introductory text." -- Financial Engineering News, June 30, 2006

From the Back Cover

Fat-Tailed and Skewed Asset Return Distributions

While mainstream financial theories and applications assume that asset returns are normally distributed, the overwhelming empirical evidence shows otherwise. Yet many professionals fail to appreciate the highly statistical models that take this empirical evidence into consideration.

Svetlozar Rachev, Christian Menn, and Frank Fabozzi understand this dilemma, and in Fat-Tailed and Skewed Asset Return Distributions, they offer you a less technical look at how portfolio selection, risk management, and option pricing modeling should and can be undertaken when the assumption of a non-normal distribution for asset returns is violated.

Topics covered in this comprehensive book include:

  • An extensive discussion of probability distributions used in finance
  • Estimating probability distributions
  • The basics of stochastic processes
  • Portfolio selection and alternative risk measures
  • Market, credit, and operational risk measurement
  • Black-Scholes option pricing model and its extensions when the model's assumptions are modified to meet the empirical distributional evidence and tests
  • And much more

Fat-Tailed and Skewed Asset Return Distributions provides a bridge between the highly technical theory of statistical distributional analysis, stochastic processes, and econometrics of financial returns and real-world risk management and investments.


Inside This Book (Learn More)
First Sentence
Most of the concepts in theoretical and empirical finance that have been developed over the last 50 years rest upon the assumption that the return or price distribution for financial assets follows a normal distribution. Read the first page
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Front Cover | Copyright | Table of Contents | Excerpt | Index | Back Cover
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Customer Reviews

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Most Helpful Customer Reviews on Amazon.com (beta)
Amazon.com: 2.6 out of 5 stars  7 reviews
19 of 21 people found the following review helpful
1.0 out of 5 stars statistical data miner March 21 2006
By Statistical Data Miner - Published on Amazon.com
Format:Hardcover
I unfortunately learned too late that the negative review of Jukka Taskinen was understatement.

The "book" is a series of shallow, disjointed chapters that just touch on the important topics. It superficially skims a wide range of issues so that the reader can be a term-dropping jack-of-all-trades but master of none.

I was partially lulled by its availability as a .pdf, which is convenient, and its title and purported thesis of heavy-tailed modeling, which really is a very important thesis but is just a red herring here: the book provides very superficial treatment of this concept throughout, without really building a solid methodological case for it (even though its true, which is why its clever and deceptive marketing, rather than a scholarly OR useful practitioner work). It provides no new insight generally, and the only new insight to me was that I am beginning to see what passes as a typical of Fabozzi publication. I'm angry I wasted the $$.
14 of 15 people found the following review helpful
5.0 out of 5 stars READ THE BACK PAGE & PREFACE! Oct. 17 2006
By M. Bull - Published on Amazon.com
Format:Hardcover
To all 1* reviewers, moaning about this being a "superficial" book - READ THE BACK PAGE, quote "...they offer you a LESS TECHNICAL look at how portfolio selection, risk management & option pricing modeling should and can be undertaken..."

Now, READ THE PREFACE: page xii "We must admit our intent at the outset was to provide a NON-TECHNICAL treatment of the topic."

If you can't understand who this book is intended for, are you qualified to write a review? To dismiss this as a book for "name droppers" reflects an arrogant misunderstanding. Everyone has to start somewhere on the learning curve.

In terms of its stated aim, this book does an excellent job. There are hundreds of thousands of investment "professionals" who have never heard of stable Paretian distributions or copulas, who would benefit from education. And, yes it is printed on cheap paper. But that makes it very light & easy to carry round! Is it overpriced? Of course - nothing new there. But savvy buyers don't pay full price anyway.
12 of 14 people found the following review helpful
1.0 out of 5 stars Too superficial to be of any value. Aug. 15 2006
By Allan D. Bennett - Published on Amazon.com
Format:Hardcover|Verified Purchase
I purchased this book because I was told that it "treated" important topics in the statistical analysis of fat-tailed distributions of price movements--namely, copulas, modeling of VaR under non-normal stable distributions, etc. Unfortunately, these topics are given little substantive coverage. The book is basically a long survey article with little practical instruction for HOW to deal with fat-tailed distributions. The one strong point of the book is the extensive list of references. Mainly though, the book suffers from the general sense of "math anxiety" that is so prevalent throughout the population. Bottom line, if you don't know enough math to deal with the technicalities that the authors so studiously avoid, you can't do anything useful with the modeling of fat-tailed distributions. Consequently, I cannot think of any audience for whom this book would be useful, other than someone wishing to do a literature search of the substantive work in this area.
18 of 22 people found the following review helpful
1.0 out of 5 stars waste of money, barely deserves one start Feb. 26 2006
By Jukka Taskinen - Published on Amazon.com
Format:Hardcover
again a typical Fabozzi publication, which is printed on cheap paper although the hefty price would have allowed for a use of higher quality paper.

But most of all, this book does not explain in required detail the distributions nor generating functions. This is for someone who wants to learn some term-dropping without profound insight.

RECOMMENDATION: TO LEARN, BUT ANOTHER BOOK. FABOZZI PUBLICATIONS ARE ALWAYS THE SAME, SUPERFLUOUS AND EXPENSIVE.
2 of 2 people found the following review helpful
2.0 out of 5 stars Little Help For the Ordinary Investing Stiff Sept. 21 2006
By Paul J. Mason - Published on Amazon.com
Format:Hardcover
As a reader of Rachev and co's earlier work 'Stable Paretian Models in Finance' this work is admittedly about halfway down from the mathematical stratosphere where the former floated. If anyone knows of a work which can clearly and convincingly explain the implications of this work for the mug punter please let me know at jenpalex@actapple.org.au.

Paul Mason

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