Abstract

http://ssrn.com/abstract=1142785
 
 

Citations (6)



 
 

Footnotes (9)



 


 



Finiteness of Variance is Irrelevant in the Practice of Quantitative Finance


Nassim Nicholas Taleb


NYU-Tandon School of Engineering; New England Complex Systems Institute

June 9, 2008

Complexity, Vol. 14, Issue 3, pp. 66–76, January/February 2009

Abstract:     
Outside the Platonic world of financial models, assuming the underlying distribution is a scalable power law, we are unable to find a consequential difference between finite and infinite variance models - a central distinction emphasized in the econophysics literature and the financial economics tradition. While distributions with power law tail exponents α>2 are held to be amenable to Gaussian tools, owing to their finite variance, we fail to understand the difference in the application with other power laws (1<α<2) held to belong to the Pareto-Lévy-Mandelbrot stable regime. The problem invalidates derivatives theory (dynamic hedging arguments) and portfolio construction based on mean-variance. This paper discusses methods to deal with the implications of the point in a real world setting.

Number of Pages in PDF File: 12

Keywords: Portfolio theory, power laws, option pricing, fat tails, risk management

JEL Classification: D8, G11, G12, G13, N00


Open PDF in Browser Download This Paper

Date posted: June 9, 2008 ; Last revised: November 16, 2012

Suggested Citation

Taleb, Nassim Nicholas, Finiteness of Variance is Irrelevant in the Practice of Quantitative Finance (June 9, 2008). Complexity, Vol. 14, Issue 3, pp. 66–76, January/February 2009. Available at SSRN: http://ssrn.com/abstract=1142785 or http://dx.doi.org/10.2139/ssrn.1142785

Contact Information

Nassim Nicholas Taleb (Contact Author)
NYU-Tandon School of Engineering ( email )
Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States
New England Complex Systems Institute ( email )
24 Mt. Auburn St.
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 18,872
Downloads: 7,179
Download Rank: 495
Citations:  6
Footnotes:  9

© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollobot1 in 0.218 seconds