The truth about asymmetric market returns: fat-tails and black swans
Market returns are asymmetric, they have fat-tails that make market data an asymmetrical distribution, not a symmetical normal distribution. Extreme Events on a Univariate Level: Understanding the Fat-tails of a Risk Driver reveals:
These findings prove that risk estimates based on the normal distribution, even with volatility clustering, systematically misrepresent the true nature of the risk being taken. More sophisticated modelling techniques are necessary in order to capture widely observed phenomena such as risk asymmetry and fat tails.
Source: http://www.finanalytica.com/uploads/ExecutiveBriefings/Factor_Distribution_Case_Study_-_5-21-09.pdf
