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Fat-tail frequencies and the new non-normal

How volatility extremes skew returns

Hermes Investment Office

Home / Fat-tail frequencies and the new non-normal: how volatility extremes skew returns

Eoin Murray, Head of Investment
29 March 2016
Risk

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  • The turbulence of early 2016 reminds us that volatility follows a broad historical pattern: long periods of relative calm typically alternate with more dramatic episodes
  • We can track the movement of stars by using a normal distribution based on standard deviations, but asset prices continue to distort the perfect symmetry of the bell curve, resulting in fat-tail events
  • The different volatility regimes in recent decades tell us that non normality is indeed the norm in financial markets. But common formulations of investment risk are blind to this
  • Being aware of the propensity for tail risk to change unexpectedly as market conditions evolve provides us with a strong foundation for developing more astute ways of managing extreme downside risk

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Eoin Murray Head of Investment Eoin is Head of Investments and a member of Hermes’ senior investment leadership team. The Investment Office is responsible to clients for the investment teams’ consistent delivery of responsible, risk-adjusted performance and adherence to the processes which earned them their ‘kitemarks’. Eoin joined Hermes in February 2015 with over 20 years’ investment experience. Eoin joined from GSA Capital Partners, where he was a fund manager. Before this, he was Chief Investment Officer at Old Mutual from 2004 to 2008 and also held senior positions at Callanish Capital Partners LLP and Northern Trust Global Investments. He began his career as a graduate trainee at Manufacturers Hanover Trust (now JPMorgan Chase) and subsequently performed senior portfolio manager roles at Wells Fargo Nikko Investment Advisors (now BlackRock), PanAgora Asset Management and First Quadrant. Eoin earned an MA (Hons) in Economics and Law from the University of Edinburgh and an MBA from Warwick Business School. Eoin is a member of the Exmoor Search and Rescue team, and a fully qualified Swiftwater and Rescue Technician. He is also a member of the management team and the trustee board of the Salusbury World charity.
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