A classical fat tail model: Pareto distribution. It was originally proposed for modeling of distribution of household with very high wealth or incomes. Generally, household (or family) income distribution is close to lognormal and is modeled accordingly - except the lognormal model grossly underestimates the number of rich. This is not in finances, of course, but still in economics, where data quality, object complexity, and modeling mindset are generally similar. Pareto distribution is used also to model the probability of severe losses in actuarial calculations. This should be rather close to risk management in finances.
Last edited by yurakm
on June 26th, 2010, 10:00 pm, edited 1 time in total.