We show that it is possible to use multivariate outliers to measure market turbulence. Multivariate outliers coincide with well-known market events. By measuring turbulence, we can estimate risk parameters more reliably and construct portfolios that are more resilient to turbulent markets. Moreover, we can enhance alpha by scaling exposure to risk as a function of market turbulence. A critical feature of our methodology is that it takes into account not only unusually volatile returns but also returns that interact in strange ways. Read the full article here.