Going to Extremes: Leptokurtosis as an Epistemic Threat

James Ming Chen
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James Ming Chen: Michigan State University

Chapter Chapter 12 in Postmodern Portfolio Theory, 2016, pp 237-245 from Palgrave Macmillan

Abstract: Abstract “Time present and time past/are both present in time future/and time future contained in time past.”1 In projecting forward rather than backward over time, economic forecasting cannot escape “timeless” moments of a different sort: the mathematical moments of the distribution of financial returns.2 Of the four moments of greatest interest to financial institutions and their regulators3—mean, variance, skewness, and kurtosis—it is the fourth moment, kurtosis, that should pose the deepest epistemic concern. Kurtosis eludes detection where it counts most—in its fat tails. Our expectations and perceptions may underestimate the most extreme risks by a significant margin. The overarching goal in financial responses to leptokurtosis and “fat tails” is the accurate forecasting of extreme events. Simple accuracy in description, if attainable and attained, would be a fantastic accomplishment.

Keywords: Risk Measure; Supra Note; Capital Asset Price Model; Downside Risk; Fourth Moment (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:pal:qpochp:978-1-137-54464-3_12

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DOI: 10.1057/978-1-137-54464-3_12

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