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Standard Deviations in the Business World

Ilyas Khairi


March 22, 2015
Erica Woods
Standard Deviations in the Business World
Case 1
Purpose of the Study There has been a financial crisis happening around the world over the last decade. It is important to understand why and what is impacting the financial crisis and how it can be improved. Black Swans in this study are events that were the Achilles heel of financial models. There are usually 25 standard deviations evens that happen several days in a row. The purpose of this study is to discuss the implications of black swan events in asset pricing and risk management. Black Swan events disappeared for S&P Index returns are measured relative to standard deviation of the conditional S&P distribution. In this study a one day lagged VIX is used to provide an understandable measure of conditional S&P standard deviation (Marsh & Pfeiderer, 2012).
The Research Question How did economists and others get it so wrong and what can be done to change it?
Have risk modelers created an industry whose intense technical debates with each other lead gullible outsiders to believe that this is a profession with genuine expertise?
"Extant models that properly encompass predictable shifts in investment risk ameliorate much of the alleged "black swan" problem and securities markets do in fact seem to be attuned to the risk of rare economic disasters and "price in" their risk"(Marsh & Pfeiderer, 2012, p 2).
Main Findings The first finding is in the presence of significant model specification risk and estimation risk, decisions made by averse decision makers are more conservative rather than aggressive. Investors want to protect themselves against the black swan risk and may purchase insurance to help with the risk, but will still lose some. The most accurate way of minimizing the…...

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