Wednesday, December 10, 2008

A description of recent events: The Black Sawn Drive ...

Sorry I have been away. I have been very busy with some recent volunteer work (at the University of King's College ) and, because of my position, it is difficult to provide guidance on the post-Lehman Brothers intensification.

However, there has been some great research produced of late. Most interestingly, the article (dated November 20th) by a group of researchers at Desjardins (article here!) said that puts into perspective why many of us have been left speechless:

"In the past month, investors have observed two events so rare that, when last witnessed, Franklin Roosevelt was midway through his second term as President of the United States—only eight single-day rallies in the S&P 500 have exceeded 10% since 1928, with the 11.58% gain on October 13 representing a ‘10.06-sigma’ event, and the 10.79% rally on October 28 being a similarly unthinkable 9.34 sigmas.

As rare as these events may seem, they are not nearly rare enough (at least according to the normal distribution). To put the recent experience in context, daily returns exceeding 7.5 standard deviations should only occur roughly once every 33 trillion trading days; to have observed even a single such event, the universe would have to have been approximately 10x older than it actually is!"

It is a great time to be an economist. These are historic times that will change the way we think about the world, models and how we evaluate risk. After all this is said, I am really looking forward to teaching again in a few weeks. More postings to come.

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