Risk and Financial Crises - Probability Theory in Financial Markets

Explore fundamental concepts of probability theory within the context of financial crises in this lecture from Yale University's Financial Markets course. Delve into the 2007-2008 financial crisis as a case study, then examine key statistical concepts including expected value, variance, covariance, and correlation. Investigate the law of large numbers and its limitations during financial turmoil, particularly in Value at Risk calculations. Learn about regression analysis for financial returns and the decomposition of asset risk into idiosyncratic and systematic components. Conclude by challenging the assumption of normally distributed financial shocks, analyzing historical stock market patterns that reveal more frequent outliers than expected, especially during crisis periods.

- Chapter 1. Financial Crisis of 2007-2008 and Its Connection to Probability Theory .
- Chapter 2. Introduction to Probability Theory.
- Chapter 3. Financial Return and Basic Statistical Concepts .
- Chapter 4. Independence and Failure of Independence as a Cause for Financial Crises.
- Chapter 5. Regression Analysis, Systematic vs. Idiosyncratic Risk .
- Chapter 6. Fat-Tailed Distributions and their Role during Financial Crises .