Tail Risk Killers: How Math, Indeterminacy, and Hubris Distort Markets

Book description

Reshape your investing strategy for an increasingly uncertain world

“An engrossing, fast-paced, terrific read for anyone interested in the financial imbalances due to too much reliance on math and too little respect for indeterminacy.”
—Tyler Durden, ZeroHedge.com

The world does not unfold according to a fixed set of rules. It is a dynamical system whose evolution looks like a bell curve with fat “tails.” The same is true of financial markets. However, every day we rely on the certainty and precision of mathematical strategies that assume the contrary to control and grow wealth in markets.

Tail Risk Killers shows you how the rigidity of model-based thinking has led to the fragility of today’s global financial marketplace, and it explains how to use adaptive trading strategies to mitigate risk in impending market conditions.

Risk management veteran Jeff McGinn pokes holes in prevalent assumptions about how financial markets act that tend to underestimate the likelihood of occurrence of extreme events. Through clear, conversational writing, real-world anecdotes, and easy-tofollow formulas, he provides a glimpse into the way tomorrow’s successful traders are viewing financial markets—with an eye for probability distributions. While illustrating how to protect your assets from tail risk, he shows you how to:

  • Implement the six axioms for risk management
  • Prepare for the unintended consequences of central banks suppressing tail risk
  • Identify and avoid the dark risks hidden in today’s derivative-laden financial system
  • Anticipate the fate of credit default swaps that may not face extinction

McGinn argues that the intervention of central banks has robbed global markets of their opportunities to adapt, but this highly relevant book shows you that it is not too late to adapt your portfolio to survive the extreme events that happen more often than popular financial models suggest.

Tail Risk Killers helps you discover useful information and processes beyond the focus of industry standards, helps you connect the dots of evolving trading strategies and time your next trade for maximum profitability.

Table of contents

  1. Cover Page
  2. Tail Risk Killers
  3. Copyright Page
  4. Contents
  5. Acknowledgments
  6. Foreword
  7. Introduction
  8. CHAPTER 1 Default-Cost Asymmetry: Humpty Dumpty Was Pushed
  9. CHAPTER 2 Risk-Minimal Trade Construction: Treasuries Since 1798 and Gold
  10. CHAPTER 3 Par Value during the Black Plague: Treasuries Are Financial Teflon
  11. CHAPTER 4 Stretch to Farthest Point Known: Thoughts on a Hyperinflation Event
  12. CHAPTER 5 The Macreconomics of Decontrol: Multisigma Sovereign Risk
  13. CHAPTER 6 Weightless Waiting for the Deflation Descent
  14. CHAPTER 7 Disintegration and Securitization
  15. CHAPTER 8 Coming to Grips with Austerity
  16. CHAPTER 9 Carry Trade II: Extremely Long Dollar Love
  17. CHAPTER 10 Japanification: Some Asset Behaviors When the Government Is at War with the Natural Order of the Universe
  18. CHAPTER 11 The Narrow Road to the Deep North: Fixed-Income Skew and Signatures of Japanification
  19. CHAPTER 12 The Price of Stability Is Pathology: Thoughts on Some Default Intervals
  20. CHAPTER 13 Product over Process: Balance Complexity with Liquidity
  21. CHAPTER 14 High Yield and Market Makers
  22. CHAPTER 15 Thinking Outside the Bubble: A Pairs Trade on the EU Experiment
  23. CHAPTER 16 Dropping Acid in Disneyland: Thoughts on the New Normal
  24. CHAPTER 17 Synthetic Fixed Income and Rates—A Repo Puzzle: What Happened in July–August 2007?
  25. CHAPTER 18 Haircuts at the Core of Capitalism
  26. CHAPTER 19 Some Rules of the Road for Risk Management: The First Three Axioms
  27. CHAPTER 20 Some Rules of the Road for Risk Management: Axiom 4
  28. CHAPTER 21 Some Rules of the Road for Risk Management: Axiom 5
  29. CHAPTER 22 Some Rules of the Road for Risk Management: Axiom 6
  30. CHAPTER 23 The Fed Is a Two-Faced Mutant Pig
  31. CHAPTER 24 What Lurks Behind Your Trading Station
  32. CHAPTER 25 The Limits of (Statistical) Independence
  33. CHAPTER 26 Risk and Regulation
  34. CHAPTER 27 The Bond-CDS Basis and a Fixed-Income Conjecture
  35. CHAPTER 28 Fear Is Where the Power Is: The Politics of Credit-Default Swaps
  36. CHAPTER 29 Are Swaps “Natural”?: Market Structure and Vietnamese Sandwiches
  37. CHAPTER 30 Twilight of the Models
  38. CHAPTER 31 Emerging Market Sovereign Credit Derivatives and Equity Markets
  39. CHAPTER 32 The Information Content of a Negative Swap Spread: Hedge Funds Turn Down Free Money
  40. CHAPTER 33 For Those about to Swap (We Salute You)
  41. CHAPTER 34 Notional Interest-Rate Swaps, Credit-Default Swaps, and Printing Press Irrelevance
  42. CHAPTER 35 The Structure of Future Finance: Lessons from a Mathematical Landscape
  43. CHAPTER 36 The Reasonable Ineffectiveness of Mathematics in Trading
  44. CHAPTER 37 A Characterization of Dark Risk
  45. CHAPTER 38 Stop Chasing Tails: Some Long-Only Opening Lines in Portfolio Theory
  46. CHAPTER 39 Financial System Resonance and Complexity
  47. CHAPTER 40 Robots and Reptiles
  49. Notes
  50. Index

Product information

  • Title: Tail Risk Killers: How Math, Indeterminacy, and Hubris Distort Markets
  • Author(s): Jeffrey McGinn
  • Release date: January 2012
  • Publisher(s): McGraw-Hill
  • ISBN: 9780071784917