The non-Gaussian behavior of financial markets, or why your MBA classes teach you nothing

Just came across a great piece today from J.P. Morgan Asset Management about portfolio allocation. It is a great empirical study about the lack of a normal distribution curve in financial market price fluctuations and the high fat-tail risk that is often not accounted for in risk management. I advise reading the full document, but the table below summarizes some of its most important findings:

Non-Gaussian distribution of asset classes

The fat-tail risk pervasive in asset classes (look at the Kurtosis on REITs!) is especially alarming when taken in context of today’s world of record implied correlations, as assets move up and down in tandem based on marginal dollar liquidity chasing (or fleeing) risk/yield.

To quote:

The results are striking. Nearly all the correlation coefficients increased to some degree (during this period of high market volatility), with only four showing a decrease. Our main diversifiers did not provide the diversification benefits anticipated.

Full document presented below.

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2 Responses to The non-Gaussian behavior of financial markets, or why your MBA classes teach you nothing

  1. LEONARD says:


    Nice work, as usual. I, for one, regularly follow your blog and appreciate it. I have agreed, and continue to do so, with your bearish outlook on the market. But, as we have seen for the past nine months, the market does what it wants anyway. Rationalizations of market movement, no matter how seemingly sound, are thus often not useful for trading. Mathematical modeling, fundamental analysis, and technical analysis are also not useful if a large portion of the players use the same information. In this very connected world, I think it is hard to demonstrate a tradable information discrepancy. So, what’s left? Why do some maney managers clean up while others burn. Does it have to do more with a street savvy sixth sense on the herding psychology of market participants than book knowlegde, and if so, is that teachable or simply genetic?

  2. Pingback: Case Studies in Finance | Corporations Finance Wisdom

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