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"Black Swans" and the Financial Crisis

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  • Terry Marsh

    ()
    (U.C. Berkeley and Quantal International Inc., 455 Market Street, San Francisco, CA 94105, USA)

  • Paul Pfleiderer

    ()
    (Graduate School of Business, Stanford University, Stanford CA 94305-7298, USA)

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    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.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

    Volume (Year): 15 (2012)
    Issue (Month): 02 ()
    Pages: 1250008-1-1250008-12

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    Handle: RePEc:wsi:rpbfmp:v:15:y:2012:i:02:p:1250008-1-1250008-12

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    Related research

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

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