Theory of Financial Risk: Basic Notions in Probability

51 Pages Posted: 4 Jul 1999

See all articles by Jean-Philippe Bouchaud

Jean-Philippe Bouchaud

Capital Fund Management

Marc Potters

Capital Fund Management; Capital Fund Management

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

Bouchaud, Jean-Philippe and Potters, Marc and Potters, Marc, Theory of Financial Risk: Basic Notions in Probability (May 27, 1999). Available at SSRN: https://ssrn.com/abstract=168148 or http://dx.doi.org/10.2139/ssrn.168148

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

Marc Potters (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

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