The Illusion of Thin-Tails Under Aggregation

Nassim Nicholas Taleb

NYU-Poly

George A. Martin

affiliation not provided to SSRN

January, 18 2012

Abstract:

It is assumed that while portfolio theory fails with daily returns, that it would work with yearly returns, an standard argument recently repeated in Treynor (2011). This paper debunks the confusion that daily returns, when non-Gaussian but with finite variance can aggregate to thin tails. Alas, portfolio theory fails in both the short and the long run. The central limit theorem operates too slowly for economic data for us to use it and take portfolio theory with any degree of seriousness. The point is illustrated with a Monte Carlo simulation.

Number of Pages in PDF File: 4

Keywords: Risk, Portfolio Theory, Treynor, Markowitz

via The Illusion of Thin-Tails Under Aggregation by Nassim Taleb, George Martin :: SSRN.