Book contents
- Frontmatter
- Dedication
- Contents
- List of figures
- List of tables
- Acknowledgements
- Part I Our approach in its context
- Part II Dealing with extreme events
- 4 Predictability and causality
- 5 Econophysics
- 6 Extreme Value Theory
- Part III Diversification and subjective views
- Part IV How we deal with exceptional events
- Part V Building Bayesian nets in practice
- Part VI Dealing with normal-times returns
- Part VII Working with the full distribution
- Part VIII A framework for choice
- Part IX Numerical implementation
- Part X Analysis of portfolio allocation
- Appendix I The links with the Black–Litterman approach
- References
- Index
5 - Econophysics
from Part II - Dealing with extreme events
Published online by Cambridge University Press: 18 December 2013
- Frontmatter
- Dedication
- Contents
- List of figures
- List of tables
- Acknowledgements
- Part I Our approach in its context
- Part II Dealing with extreme events
- 4 Predictability and causality
- 5 Econophysics
- 6 Extreme Value Theory
- Part III Diversification and subjective views
- Part IV How we deal with exceptional events
- Part V Building Bayesian nets in practice
- Part VI Dealing with normal-times returns
- Part VII Working with the full distribution
- Part VIII A framework for choice
- Part IX Numerical implementation
- Part X Analysis of portfolio allocation
- Appendix I The links with the Black–Litterman approach
- References
- Index
Summary
For the reasons we discussed in the previous chapter, exceptional events and discontinuities play a central role in our book. At least two well-known approaches are often thought of as the solution of choice when one deals with exceptional events, namely econophysics and Extreme Value Theory. It is important to position our approach in relation to these well-established disciplines, and to explain why we borrow little from their tool-kit. This we do in the next two chapters.
Econophysics, tails and exceptional events
In this and the following sections we look at econophysics from the rather reductive prism of its treatment of extreme events in general. The econophysicists' programme is far broader (and methodologically very interesting), but doing justice to it would entail too long a detour – hence our narrow focus.
In order to appreciate how extreme events fit in the broader philosophy of the econophysicists, we look at two distinct aspects of their research progamme – namely, the quest for ‘more realistic assumptions’, and the belief that valuable insight into economic and financial phenomena can be obtained using the techniques and the conceptual framework offered by the physical sciences. We start our discussion by giving a brief definition of what econophysics is.
The scope and methods of econophysics
Econophysics is a proteiform beast, and no single definition will be found satisfactory by all of its practitioners.
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- Portfolio Management under StressA Bayesian-Net Approach to Coherent Asset Allocation, pp. 40 - 47Publisher: Cambridge University PressPrint publication year: 2014