Posts tagged ‘Black Swans’
High-Speed Trading: Profit—and Danger—in Milliseconds
“Markets today are even more susceptible to sudden failure than they were two years ago during the flash crash, which brought the stock market down by about 1,000 points in mere minutes…”
Money, Power, and Wall Street (FRONTLINE)
Tail Risk: About 5x Worse Than You May Think (paper)
“We examined 50-years of historical S&P 500 Index data and compared the actual tail risk frequency and magnitude to the expectations of a typical investor operating under modern portfolio theory. The difference between the two is surprising, and it suggests that investors have significantly underestimated tail risk frequency and severity”
The Microstructure of the Flash Crash (paper)
“The ‘flash crash’ of May 6th 2010 was the second largest point swing (1,010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. For a few minutes, $1 trillion in market value vanished. In this paper, we argue that the ‘flash crash’ is the result of the new dynamics at play in the current market structure…”
A Constant Volatility Framework for Managing Tail Risk (paper)
“During crises, historical correlations between asset classes and their volatility characteristics tend to break down; asset classes which have, in normal times, been uncorrelated, suddenly become correlated and alternative investments, which have been selected based on their ability to generate alpha without beta, suddenly appear to deliver high beta with little alpha...”
A Study of Fat-Tail Risk (paper)
“…whereas the normal distribution of the daily return of the S&P would suggest a negative three-sigma event (between -3.56% and -2.36% daily returns) should have occurred 27 days over the last one hundred years, this has actually occurred over a hundred times in the 81 years since 1927. And the “normal” likelihood of a negative four-sigma event is one day every one hundred years; yet we have seen this take place an astounding 44 times since 1927…”
James Rickards on the Huge Threats to the Financial Markets
“One of the most astonishing revelations of the past decade has been how little we really understand about risks in our financial markets. The ‘once in a thousand year‘ events which previously inhabited the extreme end of the left-tail are (increasingly) manifesting in our markets leaving devastating consequences.”
NBR: Black Monday
On October 19, 1987 the DJIA dropped 508 points (-23%) in the largest single-day crash in history. This Nightly Business Report clip was broadcast that evening.
Crashes and High Frequency Trading (paper)
Interesting paper (commissioned by the UK government) on HFT’s contribution to Black Swans (click on title to open):
“This report thus suggests a largely positive answer to the question: “Can high frequency trading lead to crashes?” We believe it has in the past, and it can be expected to do so more and more in the future. Flash crashes are not fundamentally a new phenomenon, in that they do exhibit strong similarities with previous crashes, albeit with different specifics and of course time scales. As a consequence of the increasing inter-dependences between various financial instruments and asset classes, one can expect in the future more flash crashes involving additional markets and instruments. The technological race is not expected to provide a stabilization effect, overall. This is mainly due to the crowding of adaptive strategies that are pro-cyclical, and no level of technology can change this basic fact, which is widely documented for instance in numerical simulations of agent-based models of financial markets.”