Understanding and control of tail events is at the heart of many scientific disciplines. Tail event analysis can be found among many other examples in financial risk management, construction of insurances for natural hazards and also in labour market treatment effect verification. We give a short overview on 7 projects:
TEDAS - Tail Event Driven ASset allocation
TENET - Tail Event driven NETwork risk
TECOV - Tail Event driven COVar
DYTEC - DYnamic Tail Event Curves
PASYN - Principal components in an ASYmmetric Norm
COCOT- COnfidence COrridors for Tail curves
TERES - Tail Event Risk managing Expected Shortfall
Among these we later describe in more detail TEDAS. Asset allocation and risk management require active implementation of current research in quantitative finance and applied statistics. Often it is related to the correlation structure of portfolio assets or risk factors since in an asset allocation problem it determines a certain level of risk in the investment position. On the other hand correlation is not informative as to the distributional details of the portfolio.
It does not specify the dependence between variables such as assets at different tail events, but rather refers to relationship between their mean values. Modeling and understanding tail events and their dependence between potential portfolio assets is more informative and a flexible approach to hedging and asset allocation.
The improvements from holding an efficiently-selected portfolio of managed accounts or funds are so large that that the return-risk trade-offs provided by augmented portfolios clearly dominate the trade-offs available from a portfolio of stocks alone or from portfolios of stocks and bonds.
The question arises how to effectively choose from thousands of hedge funds, which ones should be included into the portfolio. It is often the case that the number of covariates p is larger than the number of observations n. TEDAS is a Tail Event Driven ASset allocation strategy that
1. takes care of tail event dependence
2. selects the important hedge factors
3. optimizes the allocation.
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