Systemic Risk and Extreme Events


I read an interesting post on ZeroHedge yesterday. The article says that the extreme negative stock returns that we witnessed in the recent past are not the typical “Black Swan[1]” events. By calling them Black Swan, the regulators are hiding behind the faulty assumptions (normal distribution of asset returns). The article says that the events are actually caused by the inactions of regulators. The regulators caused the distributions of the asset returns to change. In the new distributions, the extreme events are not extreme, they are not so rare. They were highly likely events conditional on the new probability distribution of returns.

I thought the paper presents a very different view of systemic risk.

[1] Black Swan events are the extreme events that are almost impossible according to the normal probability distribution. Nassim Taleb wrote a book about this by the title “Black swan.”



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