The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations

This paper outlines strategies for detection, measurement, and analysis of fat-tailed risks, tail-dependent risks, and risks characterized by micro-correlations.

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Date

Nov. 8, 2009

Authors

Carolyn Kousky and Roger Cooke

Publication

Working Paper

Reading time

1 minute

Recent events in the financial and insurance markets, as well as the looming challenges of a globally changing climate point to the need to re-think the ways in which we measure and manage catastrophic and dependent risks. Management can only be as good as our measurement tools. To that end, this paper outlines detection, measurement, and analysis strategies for fat-tailed risks, tail dependent risks, and risks characterized by micro-correlations. A simple model of insurance demand and supply is used to illustrate the difficulties in insuring risks characterized by these phenomena. Policy implicationsare discussed.

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Topics

Authors

Dr. Carolyn Kousky

Nonresident Fellow

Dr. Carolyn Kousky is a nonresident fellow at RFF and Associate Vice President for Economics and Policy at Environmental Defense Fund.

Roger Cooke

Senior Fellow Emeritus

Roger Cooke is a senior fellow emeritus at RFF. He joined RFF in September 2005 as the first appointee to the Chauncey Starr Chair in Risk Analysis.

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