Black Turkeys not Black Swans explain the Financial Crisis

Laurence Siegel of the CFA research foundation and Ounavarra Capital, LLC has rebutted Nassim Taleb, aka the Black Swan, on his analysis of the financial crisis.  The PDF is below, but I've included some highlights via Financial Analsysts Journal:
Nassim Nicholas Taleb has an elegant explanation for the global financial crisis of 2007-2009: It’s a black swan. A black swan is a very bad event that is not easily foreseeable—because prior examples of it are not in the historical data record—but that happens anyway. My explanation is more prosaic: The crisis was a black turkey, an event that is everywhere in the data—it happens all the time—but to which one is willfully blind.

The recent crash has also called into question the relevance of the capital asset pricing model (CAPM), not so much because anything is wrong with asserting a linear relationship between market- related risk and expected return—for that is all the CAPM does—but because the slope of the CAPM line, which links the return on riskless cash with the expected return on the market for risky assets,might be negative. In other words, the expected equity risk premium might be negative. From 1 January 1969 through 28 February 2009, the S&P 500, including reinvested dividends, had a slightly lower total return than the Ibbotson index of long-term U.S. Treasury bonds (on the basis of data from Ibbotson Associates [now Morningstar]).

Forty years and two months is a long time to wait for the equity risk premium to be realized, only to be disappointed with a realization marginally below zero. (Because of the subsequent fast recov- ery in the stock market, this condition did not last long; but stocks are still underperforming the long bond over historical time horizons lasting decades.)
Black Turkeys not Black Swans


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