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

CHAPTER 21Some Rules of the Road for Risk Management: Axiom 5

Atradable way that financial risk manifests itself is in volatility. Precisely because it is a tradable asset across different asset classes, it is worth a close look. Here we look at a derivation of the statistical properties of volatility in a general probability context and how its tradable nature gives it some interesting properties.

AXIOM 5: THERE IS A STRONG RELATIONSHIP BETWEEN VOLATILITY AND RISK

Definition: The Volatility of a Time Series Is the Square Root of Its Variance

Michel Fliess, Cedric Join, and Frederic Hatt characterized volatility in a probabilistic way in February 2011 in a preprint paper titled “Volatility Made Observable at Last.”¹ The characterization employs ...