The discipline of surviving the tail.
11 topics · 13 curated works
Assumes you know the vocabulary.
The Kelly Criterion and the Stock Market
Louis M. Rotando & Edward O. Thorp · 1992
Applies the Kelly criterion to a real historical stock and bond portfolio and shows the growth-optimal strategy would have required a specific,…
+3 more at this level
Primary sources and full treatments.
A New Interpretation of Information Rate
John L. Kelly Jr. · 1956
Shows that a gambler with private, imperfect information about outcome probabilities maximises the long-run growth rate of wealth by betting a…
+8 more at this level
12 of 13 works
Louis M. Rotando & Edward O. Thorp
Applies the Kelly criterion to a real historical stock and bond portfolio and shows the growth-optimal strategy would have required a specific, calculable leverage ratio that most real investors would find uncomfortably aggressive, illustrating the gap between growth-optimality and typical risk tolerance.
link checked 17 Sept 2026J.P. Morgan & Reuters
Lays out a standardised methodology for estimating portfolio value-at-risk from volatilities and correlations, arguing a common, transparent risk metric lets firms and regulators compare risk across asset classes.
Emanuel Derman
Argues that a pricing model is at best a crude, leaky map from a small number of observable parameters to a price, and catalogues the specific ways this map breaks down in practice.
Board of Governors of the Federal Reserve System & Office of the Comptroller of the Currency
Sets out supervisory expectations that banks treat every model as a simplification that can be wrong in ways that matter, and requires independent validation of a model's conceptual soundness, not just its outputs, as the core discipline for managing model risk.
link checked 17 Sept 2026John L. Kelly Jr.
Shows that a gambler with private, imperfect information about outcome probabilities maximises the long-run growth rate of wealth by betting a fraction of the bankroll proportional to the edge, the criterion later applied to position sizing across finance.
link checked 17 Sept 2026Philippe Artzner, Freddy Delbaen, Jean-Marc Eber & David Heath
Proposes four axioms any risk measure ought to satisfy and shows value-at-risk violates one of them, subadditivity, so it can report that diversifying has made a portfolio riskier.
link checked 17 Sept 2026Patrick de Fontnouvelle, John Jordan & Eric Rosengren
Fits loss-distribution models to actual operational risk loss data from large banks and finds required capital estimates are extremely sensitive to which statistical distribution is assumed for the tail, undermining confidence in any single operational risk capital number.
link checked 17 Sept 2026Markus K. Brunnermeier & Lasse Heje Pedersen
Traders' funding liquidity and assets' market liquidity reinforce each other, so a shock to either can spiral into both drying up together, which is what a liquidity crisis actually is.
link checked 17 Sept 2026Robert J. Barro & José F. Ursua
Extends the historical record of large economic contractions across many countries and shows a rare-disaster risk model, in which investors demand a large premium against small-probability catastrophic outcomes, can explain the equity premium without appealing to unreasonable risk aversion.
link checked 17 Sept 2026Viral V. Acharya & Alberto Bisin
Shows that in opaque over-the-counter derivatives markets a party can sell the same protection to multiple counterparties without any of them knowing, and argues a central counterparty that makes positions transparent eliminates this externality in a way bilateral OTC trading cannot.
link checked 17 Sept 2026Ole Peters
Argues standard economic models silently assume the average outcome across many parallel people equals the outcome one person experiences over time, and that dropping this ergodicity assumption makes growth-rate optimisation, not expected-utility maximisation, the description of rational behaviour under repeated risk-taking.
Thomas Ian Schneider, Philip E. Strahan & Jun Yang
Finds that banks subject to Federal Reserve stress tests cut lending to riskier borrowers roughly as intended, but that the tests' pass/fail thresholds have also been used in ways that protect the largest banks from competition, evidence of regulatory capture alongside genuine prudential benefit.
link checked 17 Sept 2026This subject genuinely sits in more than one domain. These fields approach the same ground with different methods.