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5 votes

Why worry about fat tails, if you can use stoploss?

Because we are modelling the underlying price process, not the value process of your stop-loss portfolio...
Oscar's user avatar
  • 902
4 votes
Accepted

Do normal returns make the mean-variance portfolio model perform properly?

No, even if returns were perfectly normal (it really doesn't matter whether mean is zero and standard deviation is 1 - they can be anything), it wouldn't ensure that markowitz would perform well out ...
phdstudent's user avatar
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3 votes

What is better: A negatively skewed return or a positively skewed returns distribution?

The usual answer is that most risk assets tend to exhibit left-skew, with correlations ->1 into the left tail (ie diversification breaks down). And so positively skewed assets have attractive ...
demully's user avatar
  • 5,071
3 votes

Why worry about fat tails, if you can use stoploss?

Not sure if this question deserves to be further piled onto, but alas... Large, institutional portfolios nearly always hold relatively illiquid and OTC traded instruments. There is no stop-loss order ...
Kch's user avatar
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3 votes
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Why can we assume that asset return rates are normally (or lognormally) distributed?

In the colloquial sense of the word "justified," it is not justified. I will describe why it is justified mathematically and under what circumstances and in what case it is not justified. ...
Dave Harris's user avatar
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3 votes

EuroStoxx50: long index and short futures

Small details accumulated over 10 years will explain the discrepancy. You need to simulate the actual strategy i.e. include cost of funding the long index leg, cost of margining the futures leg, ...
Ivan's user avatar
  • 1,396
2 votes

Optimize portfolio of non-normal binary return assets

For a single period, I would consider scenario optimisation: simulate your assets' returns (which you can do since you know their statistical properties, including correlations), and in this way ...
Enrico Schumann's user avatar
2 votes

Why can we assume that asset return rates are normally (or lognormally) distributed?

It is justified in that you obtain some better information than you have without it. For example, you can make the assumption and acknowledge some inaccuracy in your model. The inaccuracy of pricing ...
Attack68's user avatar
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2 votes

Why can we assume that asset return rates are normally (or lognormally) distributed?

The awful truth is that we assume that returns that are optically quite close to (log)normal are indeed (log)normal, because it makes the associated mathematics of solving almost ANY subsequent ...
demully's user avatar
  • 5,071
2 votes
Accepted

How to calculate the BHAR (Buy-and-Hold Abnormal Returns)?

Welcome to Quantitative Finance! I reckon the BHAR (Buy-and-Hold Abnormal Returns) formula you are referring to is $$\text{BHAR}_{i,h} = \prod_{t=1}^{h}(1+R_{i,t}) - \prod_{t=1}^{h}(1+R_{m,t})$$ where ...
Alper's user avatar
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1 vote

What is better: A negatively skewed return or a positively skewed returns distribution?

It's a little simplistic to say that positive skew is better, you could for example have a return distribution which is negatively skewed but has a mean of 10%, versus a positively skewed one with a ...
deftfyodor's user avatar
1 vote

Why worry about fat tails, if you can use stoploss?

This is a real life empirical example: my ex-colleague now runs a trend following strategy (with some leverage time-to-time) and did not lose money during the recent market crash all thanks to his ...
AK88's user avatar
  • 1,850
1 vote

Why worry about fat tails, if you can use stoploss?

all metrics like VaR (how much you can lose on a given day) are based on a confidence interval in the distribution. but the most important part of risk management is tail risk /extreme loss, which ...
John's user avatar
  • 370
1 vote

EuroStoxx50: long index and short futures

From a mathematical perspective and under the capital market assumptions of finance theory, you would be right. However in real life, there are a number of risks that remain that keep this from being ...
AlRacoon's user avatar
  • 6,632
1 vote

Computing Buy-and-hold abnormal returns (BHARs) $= \prod_{t=\tau_1}^{\tau_2}(1+R_{i,t}) - \prod_{t=\tau_1}^{\tau_2}(1+R_{m,t})$

Summarizing the discussion in the comments: BHAR are computed using simple returns, not logarithmic returns.
nbbo2's user avatar
  • 11.5k
1 vote

Fame-French alpha for a single stock

The reason for using Fama French for portfolios is generally that you try to quantify whether your anomaly/strategy etc. is actually capable of providing returns in excess of what could be achieved by ...
Ana's user avatar
  • 185

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