ABSTRACT
However, we’ve learned in the preceding chapters (cf. Chapter 1) that such a simple risk measure based on only the second moment of a rates of return distribution is insufficient, since it ignores both the highermoments of the pricing distributions, like skewness and kurtosis, and all fractional moments, measuring the long-term or global dependencies of dynamic market pricing. The VaR methodology also devotes insufficient attention to the truly extreme financial events, i.e., those events that are catastrophic (Embrechts et al., 1997; Bassi et al., 1998). There exists considerable anecdotal literature on such catastrophic financial events (Kindleberger, 1996), but relatively little rigorousmeasurement, analysis or theory, the exceptions being the recent article and book by Sornette (1998, 2003).
