Thursday, March 01, 2007

....such an event should not have happened in the history of the known universe

click on the headline to read the piece from the economist about the "grey tuesday". i wanted to focus on the point mentioned in the headline.......gives you a good feeling when something cam´t happen ...and then within 6-8 month the impossible happened twice!...got gold?!

wenn ihr noch ne zusammenfassung zum dienstag lesen wollt bitte auf die überschrift klicken. ich möchste mich hier lediglich auf den o.g. punkt konzentrieren. gibt einem doch gleich ein gutes gefühl wenn einieg sachen nocht passieren können ...um dann doch binnen 6-8 monaten doppelt zu geschehen.....got gold?!


.....But it may be the internal dynamics of the markets, not the evolution of the wider economy, that decides whether this is a brief shakeout or the start of a serious correction. Periods of low volatility tend to encourage risk-taking. Hedge funds have a natural inclination to buy higher-yielding (and thus riskier) instruments and sell low-yielding assets, since this delivers a positive income or “carry”. When the market falters, these positions rapidly lose money. (just ask this person....)

For example, the modest rise in the yen—2.3% against the dollar on February 27th—wiped out about half the annual interest gain accruing to investors who sold yen and bought dollars. ...

Investment banks use “value-at-risk” models which mean that, when volatility rises, they cut the capital they allocate to trading. This usually means selling assets. So a sudden jump in volatility tends to generate further volatility. ....

What matters is how many actors have all made the same bet. One of the oldest market mistakes is the assumption that you can get out of a position as easily as you entered into it.
According to Goldman Sachs, the latest jump in the Vix (a measure of stockmarket volatility) took it eight standard deviations from its average.
If conventional models are correct, such an event should not have happened in the history of the known universe. (read the comment at the end of the post)


Then again, the move in energy prices that caused the collapse last year of Amaranth, the hedge fund, was a nine standard-deviation event.
Perhaps modellers do not know the universe as well as they would like to think.
this sums it up.... :-)
das faßt es ganz gut zusammen..... :-)


i want to highlight this comment
Since standard deviation implicitly assumes a normal distribution, it is completely meaningless for Goldman Sachs to speak of an eight-standard-deviation move in VIX (a claim promptly repeated on CNBC by a stock shill yesterday).

Two possibilities: either the 'analyst' at GS who manufactured this bogus statistic is innumerate, or he's a lying liar. I lean toward the latter.

For the Economist to repeat and broadcast this absurd bit of statistical disinformation showcases its descent from the iconoclastic independent voice of decades ago to today's dumbed-down Matrix mouthpiece.

Maybe they should hire a few economists ... bwa ha ha ha.

thanks for the insight!



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2 Comments:

Anonymous Anonymous said...

It is well known that daily stock returns are not normally distributed -- they are "fat-tailed." Historical volatility, derived from daily stock returns, is even more fat-tailed. And so is implicit volatility calculated from option prices, which closely tracks it.

Since standard deviation implicitly assumes a normal distribution, it is completely meaningless for Goldman Sachs to speak of an eight-standard-deviation move in VIX (a claim promptly repeated on CNBC by a stock shill yesterday).

Two possibilities: either the 'analyst' at GS who manufactured this bogus statistic is innumerate, or he's a lying liar. I lean toward the latter.

For the Economist to repeat and broadcast this absurd bit of statistical disinformation showcases its descent from the iconoclastic independent voice of decades ago to today's dumbed-down Matrix mouthpiece. Maybe they should hire a few economists ... bwa ha ha ha.

3:07 AM  
Blogger jmf said...

thanks for the insight.

my knowledge on this topic isn´t very good ...

and this a polite description.... :-)

i will post your comment in the blog.

3:40 AM  

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