How Unlucky is 25-Sigma?
Kevin Dowd, John Cotter, Chris Humphrey, Margaret Woods
TL;DR
This paper examines the implications and likelihood of observing extremely rare 25-standard deviation events in financial markets, highlighting their significance during the 2008 credit crunch.
Contribution
It provides an analysis of the probability and impact of 25-sigma events in finance, challenging assumptions about market stability during extreme fluctuations.
Findings
25-sigma events are extraordinarily rare but possible.
Such events can have significant financial impacts.
Standard models may underestimate the likelihood of extreme market moves.
Abstract
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."
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