This FT Alphavillian has a confession to make. When she first started working in finance, she read Nassim Nicholas Taleb’s Fooled by Randomness and was quite taken by it. She recommended it to friends. Choice quotes by the man in the FT were dutifully clipped out and pinned to the cubicle wall — right next to a chart of monoline CDS spreads widening out and a list of biggest SIVs. Such a crisis groupie, we know…
So, what happened to NNT? And at what point did he get a bit “Deep Thoughts, by Jack Handey”? Read more
If anyone can bring metaphor and illustration to the market in volatility, it’s Chris Cole at Artemis Captial Management, a volatility-focused investment firm.
Take the intro of his latest note as an example: Read more
Perhaps some Deutsche Bank analysts have been into the absinthe.
From a DB research note out Monday: Read more
Hark — the standard deviation devils sing (again).
As Reuters columnist John Kemp pointed out yesterday, recent swings in the commodities complex have produced some impressive probabilities figures. The kind you can wheel out in dinner party conversation. For instance, front-month Brent crude futures sank almost $12 per barrel (or over 9 per cent) on Thursday, leading the market down from over $120 at the start of the day to under $110. Read more
The above is a presentation from a representative of Tokyo Electric Power on the subject of spent fuel storage at the Fukushima nuclear power plant. In November 2010, it was delivered to the IAEA.
In March 2011, it understandably went viral. Read more
Ever wondered why there was so much spent fuel in water pools around the Fukushima nuclear plant? We have.
Only we’d never realised the answer’s striking lesson (metaphor?) for tail risk in financial — especially, energy — markets. Read more
What’s that saying?
You wait for a Black Swan for ages and then three show up at the same time? Read more
We bring up this dangerous malady, because Citi FX strategist Steven Englander does in his latest piece. But first, take a glance at these charts. The first is the S&P 500 — which is almost at the second anniversary of rebounding from its cycle low:
It’s that time of year again.
Saxo Bank — inspired by the black swans of Nassim Taleb — have drawn up their 10 ‘outrageous predictions’ of the year. The idea is that these are unpredictable (eh?) events with potentially massive impact. And, as you might imagine, drawing them up is an admittedly unscientific exercise. Nevertheless, Saxo Bank suggests clients might use them to stress test portfolios, or to think about far out-of-the-money options. Read more
Correlation, as we are now well learning, is a phenomenon which increases when market tensions rise.
That is because when investors flock to the exits, they tend to move more uniformly than usual. Read more
Further adventures in sovereign wealth fund knife-catching — of a sort.
We’ve noted before that equity volatility has hampered sovereign wealth fund returns a tad lately. Tuesday’s WSJ offered a glimpse of a potential flip-side to this — SWFs buying protection on even worse reiterations of that volatility. Read more
Wall Street’s hottest new product might soon be fear itself, reports Bloomberg. According to the wire, Bill Gross’ Pimco is planning a fund that will make investors; money in the event of market declines of more than 15 per cent. Insurance against low probability events of this type, dubbed ‘Black Swans’ by author and investor Nassim Nicholas Taleb, has been in high demand since the events of 2008, says Bloomberg. The wire cites Morgan Stanley research as noting a fivefold increase in the trading of credit derivatives that speculate on market volatility in that time. Amongst the latest to launch is Barclays’ inverse S&P 500 VIX Short-Term Futures ETN, which listed as recently as Monday. Read more
Nassim Nicholas Taleb, of Black Swan fame, doesn’t just tweet on Twitter. He now tweets the explanations for his Twitter tweets on Twitter. No, really. See FT Alphaville for more. Read more
Did a hedge fund advised by Nassim Taleb cause the Flash Crash? The WSJ notes that a an options bet by the Universa fund might have triggered risk offsets elsewhere, starting a tsunami of hedging sales. Somewhat ironic for the creator of the Black Swan concept, if true, FT Alphaville notes. Read more
A note on Nassim Nicholas Taleb’s website, www.fooledbyrandomness.com, mentions a coming addition to his seminal Black Swan:
PLEASE NOTE THAT I AM ON MEDIA HIATUS Nov 2009 to May 2010 with the 2nd edition of The Black Swan (and perhaps, hopefully, permanently, if the book publishers give me a break). Read more
Were you fooled by Nassim Nicholas Taleb’s randomness?
Was the Black Swan too dark for your comprehension? Read more
Alternate title: Building a better Monte Carlo model.
Risk managers and investors will, of course, be familiar with Monte Carlo simulations — which are used in finance to value potential loan losses and things like portfolio risk or derivatives. The precise simulation varies from model to model but in general work something like this: define a domain of possible inputs, generate random inputs from the domain, apply some algorithms and then aggregate the results. Read more
What happens when you get Rick Bookstaber and Nassim Nicholas Taleb in the same room, to talk about one of the most controversial risk measures of the financial crisis?
They (almost) agree. Read more
On Thursday, the US House of Representatives Committee on Science & Technology will turn its attention to financial modeling.
Specifically, the committee will be scrutinising the role of the much-maligned Value-at-Risk model, which was meant to measure the maximum loss on a banking portfolio at a given probability and time horizon, in the current financial crisis. Read more
Remember the clash between Janet Tavakoli and Nassim Taleb over a profile of the Black Swan man in GQ?
Tavakoli, of Tavakoli Structured Finance, highlighted a seeming error in the GQ article, which was penned by novelist Will Self. In it, Taleb was quoted as having “made $20bn for our clients, half a billion for the Black Swan fund”. Taleb claimed it was a misquote, Tavakoli still appeared suspicious of Taleb’s claimed returns. Read more
What will the quants do next? Judging by presentations at the CFA conference in Vancouver, many think they have worked out what happened to them last August, and believe they have learned the lesson.
The main problems – known well enough by now – as presented by various quants here in Vancouver over the last two days seem to be as follows: Read more