Theory of Financial Risk: Basic Notions in Probability
51 Pages Posted: 4 Jul 1999
Date Written: May 27, 1999
Abstract
Risk control has become one of the major concern of financial institutions. The need for adequate statistical tools to measure and anticipate the amplitude of the potential moves of financial markets is clearly expressed, in particular for derivative markets. Classical theories, however, are based on simplified assumptions -- such as Gaussian statistics -- and lead to a systematic (and sometimes dramatic) underestimation of real risks.
We summarize a few basic notions in probability theory which are useful in a financial context: Statistics of Extremes, Sums of Random Variables, Central Limit Theorems and Deviations, Correlations and Dependence, and a brief introduction to Random Matrix Theory.
JEL Classification: G13
Suggested Citation: Suggested Citation