Cutting Edge introduction: Tales of tails
It is a cliché that returns are fat-tailed, but that doesn’t make the distributions any easier to work with. However, drawing on the father of their application in finance – and some thermodynamics – may make it a bit easier. Laurie Carver introduces this month’s technical articles
Benoît Mandelbrot was a maverick Polish-French-American mathematician most famous for his invention of fractals – shapes with a structure that looks the same at all scales – which, aside from mathematics, was a great contribution to student dormitory interior design. He was also the first to show the importance of fat-tailed probability distributions to finance.
While working as a researcher at IBM in the 1960s, he had the freedom to study almost anything he pleased, and chose a subject that did
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