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Market-Based Solutions to Vital Economic Issues


Market-Based Solutions to Vital Economic Issues
Oct 16, 2013

Moment-Implied Densities: Properties and Applications


Suppose one uses a parametric density function based on the first four (conditional) moments to model risk. There are quite a few densities to choose from and depending on which is selected, one implicitly assumes very different tail behavior and very different feasible skewness/kurtosis combinations. Surprisingly, there is no systematic analysis of the tradeoff one faces. It is the purpose of the article to address this. We focus on the tail behavior and the range of skewness and kurtosis as these are key for common applications such as risk management.

Note: Research papers posted on ResearchGate, including any findings, may differ from the final version chosen for publication in academic journals.

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