Extreme Risk and Fractal Regularity in Finance

34 Pages Posted: 8 Aug 2012

See all articles by Laurent E. Calvet

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

Adlai J. Fisher

University of British Columbia (UBC) - Sauder School of Business

Date Written: August 8, 2012

Abstract

As the Great Financial Crisis reminds us, extreme movements in the level and volatility of asset prices are key features of financial markets. These phenomena are difficult to quantify using traditional models that specify extreme risk as a rare event. Multifractal analysis, whose use in finance has considerably expanded over the past fifteen years, reveals that price series observed at different time horizons exhibit several forms of scale invariance. Building on these regularities, researchers have developed a new class of multifractal processes that permit the extrapolation from high-frequency to low-frequency events and generate accurate forecasts of asset volatility. The new models provide a structured framework for studying the likely size and price impact of events that are more extreme than the ones historically observed.

Suggested Citation

Calvet, Laurent E. and Fisher, Adlai J., Extreme Risk and Fractal Regularity in Finance (August 8, 2012). Available at SSRN: https://ssrn.com/abstract=2126466 or http://dx.doi.org/10.2139/ssrn.2126466

Laurent E. Calvet (Contact Author)

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Adlai J. Fisher

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8331 (Phone)
604-822-4695 (Fax)

HOME PAGE: http://finance.sauder.ubc.ca/~fisher

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