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Extreme Events Theory and Application
Abstract
In standard statistical methodologies, the probability that the extreme event will occur is very small. But the expected losses in real world markets are higher and sometimes with catastrophic outcomes. Here it seems that the fact that we could lose a certain amount of money 95% or 99% of the time tells us absolutely nothing about what could happen the other 5 or even 1 percent of the time. For that reason, instead of estimating the certain loss, as the standard statistical methodologies account, we introduce a technique known as a “tail risk protecting strategy” or “the barbell investment strategy.” In this chapter, analyzing the copper market movements I understand that the market has been conditioned to believe that the copper demand will exceed its supply. Therefore, I suggest to protect against a growing price-inflation risk. The analyses are conducted using the statistical software STATA 11 and Excel Spreadsheets.
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