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"Black Swans" and the Financial Crisis

Author

Listed:
  • 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)

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.

Suggested Citation

  • Terry Marsh & Paul Pfleiderer, 2012. ""Black Swans" and the Financial Crisis," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 15(02), pages 1-12.
    • Handle: RePEc:wsi:rpbfmp:v:15:y:2012:i:02:n:s0219091512500087
    DOI: 10.1142/S0219091512500087
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    Citations

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    Cited by:

    1. Taufiq Choudhry & Ranadeva Jayasekera, 2015. "Level of efficiency in the UK equity market: empirical study of the effects of the global financial crisis," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 213-242, February.
    2. Glette-Iversen, Ingrid & Aven, Terje, 2021. "On the meaning of and relationship between dragon-kings, black swans and related concepts," Reliability Engineering and System Safety, Elsevier, vol. 211(C).
    3. Konstantinos Skindilias & Chia Lo, 2015. "Local volatility calibration during turbulent periods," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 425-444, April.

    More about this item

    Keywords

    Black swans; fat tails; unknown unknowns; conditional S&P returns; VIX; financial crisis; model failure;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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