Thursday, January 30, 2014

Here Is The Paper "How Unlucky Is 25 Sigma?" (25 Standard Deviation Moves Basically Don't Happen)

In the post immediately below, "Natural Gas: 'Someone Just Got Amaranth'd'" I had linked to a working paper version that is no longer on the net.
Note to self: Check the link before hitting "Publish".
Via arXive.org:
How Unlucky is 25-Sigma?
By
Kevin Dowd, John Cotter, Chris Humphrey and Margaret Woods
March 24 2008
1. Introduction

One of the more memorable moments of last summer’s credit crunch came when the CFO of Goldman Sachs, David Viniar, announced in August that Goldman’s flagship GEO hedge fund had lost 27% of its value since the start of the year. As Mr. Viniar explained, “We were seeing things that were 25-standard deviation moves, several days in a row.”

One commentator wryly noted: That Viniar. What a comic. According to Goldman’s mathematical models, August, Year of Our Lord 2007, was a very special month. Things were happening that were only supposed to happen once in every 100,000 years. Either that ... or Goldman’s models were wrong (Bonner, 2007b). But sadly Goldman were not alone. In 2007 alone, massive losses were announced by Bear Stearns, UBS, Merrill Lynch and Citigroup, and then there were the earlier financial disasters – 1987, Daiwa, Barings, Long-Term Capital, the dotcoms, Russia, East Asia, and so on – and afterwards Société Générale and Bear Stearns again in early 2008, with rumours of more yet to come. Citi’s case was particularly interesting....MORE (7 page PDF)