Pricing Tail

From the man who wrote Moneyball, Micheal Lewis has an article in the New York Times about the career of John Seo, who has made a career of placing the correct premiums on insurance for almost inconceivable disasters.

“Tail risk,” as it is known to quantitative traders, for where it falls in a bell-shaped probability curve. Tail risk, broadly speaking, is whatever financial cataclysm is believed by markets to have a 1 percent chance or less of happening. In the foreign-exchange market, the tail event might be the dollar falling by one-third in a year; in the bond market, it might be interest rates moving 3 percent in six months; in the stock market, it might be a 30 percent crash. “If there’s been a theme to John’s life,” says his brother Nelson, “it’s pricing tail.”

(h/t evangelical outpost)

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