"Black Swans" and the Financial Crisis

Terry Marsh () and Paul Pfleiderer ()
Additional contact information
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

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2012, vol. 15, issue 02, 1-12

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.

Keywords: Black swans; fat tails; unknown unknowns; conditional S&P returns; VIX; financial crisis; model failure (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2012
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219091512500087
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:rpbfmp:v:15:y:2012:i:02:n:s0219091512500087

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219091512500087

Access Statistics for this article

Review of Pacific Basin Financial Markets and Policies (RPBFMP) is currently edited by Cheng-few Lee

More articles in Review of Pacific Basin Financial Markets and Policies (RPBFMP) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().