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THEORY OF FINANCIAL

RISKS

FROM

STATISTICAL PHYSICS TO RISKMANAGEMENT

JEAN-PHILIPPE OUCHAUD

MARCPOTTERS

CAMBRIDGE

UNIVERSITY

PRESS

PUBLISHED

THE PRESS SYNDICATE

THE LISIVERSITY OF CAhILIRlDCE

The Pitt Building, Tmmpington Street, Cambridge, United Kingdom

CAMBRIDGE UNIVERSITY PRESS

The

U~nburgh uilding, Cambridge CB2

2RU,

40 West 20th Street, New York,

10011-4211.

USA

Stamford Road, Oakleigh, VIC

166.

Australia

Ruiz

de Alarcttn

13,

28014,

Madrid, Spain

Dock

House, The Watwfntnt. Cape Town

8001,

South Africa

Jean-Philippe Bouchaud

and

Marc Potters

2OQO

This

book

is in copyright. Subject to statutory exceptionand to the provisions of relevant collective licensing agreements:no reproduction of any part may rake place withoutthe written permission of Cambridge Univenity Press.First published

2000

Reprinted

200

Printed in the United

Kingdom

at the U~liversity ress, Cambridge

Typeface

Times llll4pt.

System

LKTg2,

[DBD]

catalogue record of

rhis

book

available from he

British

Libra?

ISBN

521 78232 5 hardback

Foreword

Preface

Contents

Probability theory: basic notions

1.1 Introduction1.2 Probabilities1.2.1 Probability distributions1.2.2 Typical values and deviations1.2.3 Moments

and

characteristic function1.2.4 Divergence of moments

symptotic behaviour1.3 Some useful distributions1.3.1 Gaussian distribution1.3.2 Log-normal distribution1.3.3 Levy distributions and

Paretian

tails1.3.4 Other distributions

1.4

Maximum of random variables

tatistics of extremes1.5 Sums of random variables

1.5.1

~onvoLtions1.5.2 Additivity of cumulants and of

tail

amplitudes1.5.3 Stable distributions and self-similarity1.6 Central limit theorem1.6.1 Convergence to a Gaussian1.6.2 Convergence to a Uvy distribution1.6.3 Large deviations1.6.4 The

CLT

at work on