Looking for extremely rare events ?

As mentioned in a recent post on http://www.mafeco.fr/ (here), David Viniar who used to work as a director for Goldman Sachs mentioned that « We are seeing things that were 25-standard deviation events, several days in a row », (seehere). It was in 2007 much before the recent financial crisis (and the recent – real – extremal events)
I have to confess that I couldn’t do the maths with R, but this has been done recently in a research paper,
Dowd, K.; Cotter, J.; Humphrey, C.; Woods, M.(2008), « How unlucky is 25 sigma? », Journal of Portfolio Management, Vol.34(4), pp.76-80
It turns out that 25 times the standard deviation, for a gaussian distribution, is as unlikely yo happened as winning 21 or 22 consecutive weeks at the BritishNational Lottery ! So who can still believe that Gaussian distributions can still be used in financial econometrics ?

OpenEdition suggests that you cite this post as follows:
Arthur Charpentier (April 5, 2009). Looking for extremely rare events ? Freakonometrics. Retrieved July 17, 2024 from https://doi.org/10.58079/ouau

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.