BLACK SWAN EVENT
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Context
- Capital outflows to the tune of $100 billion are likely to take place from India in a major global risk scenario or a black swan event, says a Reserve Bank of India (RBI) study.
What are Black Swan Events
- The term "black swan event" describes events with catastrophic results, like the collapse of a currency or a huge stock value loss. Economists use the term for events that economic models couldn't predict.
- The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader. Taleb wrote about the idea of a black swan event in a 2007 book prior to the events of the 2008 financial crisis.
Examples of Past Black Swan Events
- The crash of the U.S. housing market during the 2008 financial crisis is one of the most recent and well-known black swan events. The effect of the crash was catastrophic and global, and only a few outliers were able to predict it happening.
- Also in 2008, Zimbabwe had the worst case of hyperinflation in the 21st century with a peak inflation rate of more than 79.6 billion percent. An inflation level of that amount is nearly impossible to predict and can easily ruin a country financially.
- The dotcom bubble of 2001 is another black swan event that has similarities to the 2008 financial crisis. America was enjoying rapid economic growth and increases in private wealth before the economy catastrophically collapsed. Since the Internet was at its infancy in terms of commercial use, various investment funds were investing in technology companies with inflated valuations and no market traction. When these companies folded, the funds were hit hard, and the downside risk was passed on to the investors. The digital frontier was new so it was nearly impossible to predict the collapse.
- A more recent example could be the emergence of the COVID-19 virus that caused a global pandemic beginning in the Spring of 2020, and which disrupted markets and global economies around the world.
What Is a Black Swan Event in the Stock Market?
- A black swan event in the stock market is often a market crash that exceeds six standard deviations, making it exceedingly rare from a probabilistic standpoint. Some have argued that stock prices are "fat-tailed" and that such events are, in reality, more frequent than the statistics would let on.
Why Do They Call It a Black Swan Event?
- A black swan is considered to be rare, since most swans are white. In fact, the story goes that black swan were thought once to not at all exist, until finally one was discovered. The lesson is that what we think are very rare events may be more common than previously thought.
What Is a Grey Swan Event?
- A grey swan event is an outlier, but which is more probably than a black swan. As a result, people can better prepare for and hedge against a grey swan than for a black swan.
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