Tuesday, January 24

What is a Black Swan Event?

Black Swan Event in the Markets?

On CNBC the guest chartist has just been talking about the possibility of a Black Swan event.

So what is a Black Swan event?

The term refers to "unexpected events of large magnitude and consequence". It was developed by scientific advisor Nassim Nicholas Taleb at Universa Investments.

The reason the CNBC guest predicts the occurrence of a black swan event is the mismatch between the VIX which is low and the SKEW which is rocketing upwards. So basically we can expect the unexpected, with a significant event occurring that will affect stock markets and which ought to provide a buying opportunity.

It is also said that although these events are very difficult to predict they may be catastrophic for our bank balances, and may even change the way we look at the safety of our investments forever! So quite important.
Nicholas Taleb gives all the details in his book (now available for the Kindle) The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility"

To summarize a black swan event is a surprise, it has a major impact, and it is rationalized after the event (implying that it could have been predicted, whereas in reality it couldn't).

So charts predicting an unpredictable 'black swan' event seems a little unlikely, although I guess that the chartist on CNBC was being a bit loose with his terminology. The charts according to him are pointing to an unexpected pull back in the markets and a subsequent buying opportunity. This may of course happen but it would not be a black swan event according to the definition above.