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A single number cant hedge against economic catastrophes
Company: Technische Universitaet Muenchen
Company Url: Click here to open
Year Of Publication: 1999
Month Of Publication: July
Pages: 18
Download Count: 1236
View Count: 6203
Comment Num: 0
Language: EN
Source: working paper
Who Can Read: Free
Date: 9-12-2002
Publisher: Administrator
Summary
Mathematics and statistics have transformed the day-to-day trading in the world's financial markets. This has lead to new ways to reduce (or "hedge") risks which provides an important service to society, but also a temptation to very big gambles, with a potential for extreme losses. This paper discusses some of the ways statistics and mathematics can be used to understand and protect against very large, "catastrophic" financial risks. We argue that means don't mean anything for catastrophic risk, that separate large financial risks often are better handled by separate companies, and that the mathematical aspects of risk can't be summarized into one number. We also believe that there is a large potential for improved risk management in financial institutions, where extreme value theory, a speciality of the present authors, may be a useful tool. Improvements, however will not come for free but require long and hard work, where mathematics is only one part of the total effort.
Author(s)
Rootzen, Holger Sign in to follow this author
Kluppelberg, Claudia Sign in to follow this author
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