"Black Swans" and the Financial Crisis

"Black Swans" and the Financial Crisis Post-mortems of the financial crisis typically mention "black swans" as the rare events that were the Achilles heel of financial models, manifesting themselves as "25 standard deviation events occurring several days in a row". Here, we briefly discuss the implications of "black swan" events in asset pricing and risk management. We then show that the "black swans" problem virtually disappears for S&P Index returns when surprises are measured relative to the standard deviation of the conditional S&P distribution. In our illustration, we use the one-day-lagged VIX as an easy-to-understand measure of that conditional S&P standard deviation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Pacific Basin Financial Markets and Policies World Scientific Publishing Company

"Black Swans" and the Financial Crisis

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Publisher
World Scientific Publishing Company
Copyright
Copyright ©
ISSN
0219-0915
eISSN
1793-6705
DOI
10.1142/S0219091512500087
Publisher site
See Article on Publisher Site

Abstract

Post-mortems of the financial crisis typically mention "black swans" as the rare events that were the Achilles heel of financial models, manifesting themselves as "25 standard deviation events occurring several days in a row". Here, we briefly discuss the implications of "black swan" events in asset pricing and risk management. We then show that the "black swans" problem virtually disappears for S&P Index returns when surprises are measured relative to the standard deviation of the conditional S&P distribution. In our illustration, we use the one-day-lagged VIX as an easy-to-understand measure of that conditional S&P standard deviation.

Journal

Review of Pacific Basin Financial Markets and PoliciesWorld Scientific Publishing Company

Published: Jun 1, 2012

Keywords: Black swans fat tails unknown unknowns conditional S&P returns VIX financial crisis model failure

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