👉 Levy engineering is a method used in financial engineering and risk management to model and manage the risks associated with large, infrequent market events, such as black swan events or extreme market shocks. It involves constructing portfolios of derivatives and other financial instruments that can absorb or mitigate the impact of these rare but potentially catastrophic occurrences. By carefully designing and implementing a Levy process—a stochastic process with heavy tails—engineers can better capture the fat-tailed nature of financial returns and the potential for extreme losses. This approach allows for more robust risk assessment, pricing, and hedging strategies compared to traditional models that assume normal distributions of returns. Ultimately, levy engineering helps financial institutions prepare for and manage the uncertainties posed by extreme market conditions.
