Dog looking at a Window
Didier Darcet
2 April 2019

The Missing Variable

The previous publication dealt with providing a formal measure of fragility, shown to be the slope of a return to variance graph. In this letter we analyse why this property is a necessary addition to modern portfolio theories (MPTs). MPTs focus on correlation across assets and on Value-at-Risk. These provide insightful information in calm market phases, but often implode in tails, when they are most needed. The fragility theory introduces a new variable−the fragile or antifragile nature of investment assets−to help capture hidden risks. The missing variable from MPTs is linked to most of the “unexplained” market behaviors described in this publication.