When Market Indices Go Bad

Posted on Do 15 November 2007 in misc • 2 min read

  • Economy
  • Random
  • Stocks tags:
  • Black Swans
  • Golden Swans
  • Markets meta: _aioseop_keywords: Black Swans, Golden Swans, Markets, Statistics, Investing, Market Modeling, Trending, Trading author:

    In a few previous posts I explored how percent gain and loss distributions for indices tend to follow a power law distribution instead of the widely accepted Gaussian distribution (bell curve). I tried to show that "way out there" events, both positive and negative, tend to occur more frequently in real life than under the standard bell curve. The negative outlier events are called "Black Swans" which was coined by Mr. Nassim Taleb while the positive ones are called "Golden Swans". I'm not sure who coined the term Golden Swan but the first time I heard them was from Bill.

    Bill had left me a few comments on one of those posts and linked to some research he'd done a long time ago (2006) on the frequency of Black and Golden Swans. We both agree that these swan events occur more frequently than Wall Street likes to believe and that Black Swans have a tendency to occur more frequently than Golden Swans. His work is fantastic and its worth bookmarking in times when you feel like falling back to modeling the markets on a bell curve.

    The mere fact that Black Swans occur more frequently than their "shiner cousin" presents any patient market participant, with ready cash, the ability to snap up good companies at a cheap price. Statistics and mathematics finally caught up to the old adage, which still applies today, "be fearful when others are greedy and greedy when others are fearful!"