Michael R. Powers
- Published in print:
- 2014
- Published Online:
- November 2015
- ISBN:
- 9780231153676
- eISBN:
- 9780231527057
- Item type:
- chapter
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231153676.003.0003
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter examines complex probability distributions whose shapes make them appropriate for characterizing insurance and other financial risks. In particular, it introduces two important families ...
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This chapter examines complex probability distributions whose shapes make them appropriate for characterizing insurance and other financial risks. In particular, it introduces two important families of distributions: the Pareto family and the symmetric Lévy-stable family, both of which are frequently used to model particularly “risky” random variables with heavy tails (i.e. with large amounts of weight spread over the more extreme values of the random variable). To describe the measurement of risk, the chapter begins by defining the statistical moments of a distribution. It then shows how these quantities are used to compute the expected value (mean), standard deviation, and other helpful parameters.Less
This chapter examines complex probability distributions whose shapes make them appropriate for characterizing insurance and other financial risks. In particular, it introduces two important families of distributions: the Pareto family and the symmetric Lévy-stable family, both of which are frequently used to model particularly “risky” random variables with heavy tails (i.e. with large amounts of weight spread over the more extreme values of the random variable). To describe the measurement of risk, the chapter begins by defining the statistical moments of a distribution. It then shows how these quantities are used to compute the expected value (mean), standard deviation, and other helpful parameters.
