When it comes to black swans, there ain’t nothin’ like the real thing, baby
| Aug 26th, 2010 | Filed under: Academic Research, Hedge Fund Industry Trends, Today's Post | By: AAA Staff |
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“Ain’t nothing like the real thing, baby
Ain’t nothing like the real thing”
So sang Marvin Gaye and Tammi Terrell in their 1968 hit song about how nothing can really replace reality.
The simple yet effective lyrics can also apply to academia, which is rife with abstract scenarios, not real-life situations. Nowhere is this truer than in finance, where dreaming up hypothetical disaster scenarios is part of the job.
Thankfully for us, few of these scenarios ever come to pass. But still many academics secretly dream of encountering a scenario so bizarre that it tests their fundamental assumptions and hypotheses. In other words, the real thing.
So you can imagine how exciting it must be for those secretly pining for a disaster when one finally happens. For them, the failure of Lehman Brothers and the subsequent cascade of shocks to global financial markets turned out to be a pretty awesome, real-life, worst-case scenario. Only in their imaginations could global liquidity completely dry up and entire segments of the free market system grind to a halt.
That’s how George Aragon of Arizona State University and Philip Strahan of Boston College frame their recently published research on hedge funds as liquidity providers. While dreaming up potential “black-swan” scenarios and running them through statistical models and algorithms is always good fun for academics and risk managers, it’s even better when a true “almost-end-of-the-financial-world” scenario can be dissected and analyzed.
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