Wednesday, March 18, 2009

Fama and French on Taleb

Nassim Taleb (of Black Swan fame) has received a lot of press of late for his argument that returns are fatter tailed than the normal distribution assumes. He has taken his arguments one step further and consistently railed against Nobel prize winners in financial economics (and actually academics in general - although this latter piece is more of an incoherent rant).

A fair question then is whether the idea of fatter tails is new to financial economics. Turns out it isn't. As Gene Fama points out the idea is well known and well understood (at least by academics).

Furthermore, Fama's book "Foundations of Finance" which is used by many finance Ph.D. programs as a basic text discusses the issue. My edition of the book is copyrighted 1976.

Fama does point out that from a risk management point of view, the issue of whether tails are fat or not is crucial. But from a portfolio management view it doesn't really matter too much.