The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations

by Carolyn Kousky and Roger M. Cooke

- Recent events in the financial and insurance markets, as well as the looming challenges of a globally changing climate point to the need to re-think the ways in which we measure and manage catastrophic and dependent risks. Management can only be as good as our measurement tools. To that end, this paper outlines detection, measurement, and analysis strategies for fat-tailed risks, tail dependent risks, and risks characterized by micro-correlations.

Kousky, C. and R.M. Cooke (2009). "The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations." RFF Discussion Paper 09-36-REV, Nov 2009.