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The Handbook of Fixed Income Securities, Eighth Edition, 8th Edition by Steven V. Mann, Frank J. Fabozzi

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CHAPTERSIXTY-EIGHTHEDGING TAIL RISK

STEPHEN J. ANTCZAK, CFA

The recent financial crisis has created an increased focus on “tail risk” and ways to minimize exposure to the unexpected. Once the domain of risk managers and fringe thinkers on trading desks, it has become a common phrase among the lexicon on trading floors. For that matter, it is a common phrase even away from trading floors (e.g., Google “tail risk” and one may be surprised at the number of hits received). In fact, a number of hedge funds have recently been created solely to take advantage of tail risk.

In this chapter, we first discuss why tail events seem to occur with such regularity. We find that one or all of three characteristics (leverage, transient funding, and the influence ...

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