AdvancedMAD Academy0:46Risk

The Events the Model Says Cannot Happen

Financial returns have fatter tails than a normal distribution, which is why 'once in ten thousand years' events keep arriving every decade.

0:46 · 6 scenes

This lesson is part of a MAD Academy plan.

What the Lesson Covers

  1. 0:00Markets produce far more extreme days than the standard models allow for.
  2. 0:05The mismatch. A normal distribution says a large move is impossibly rare. Reality disagrees.
  3. 0:15Why the model fails. Returns are not independent. Panic clusters, and volatility begets volatility.
  4. 0:24What it means for sizing. Any position that cannot survive a five-sigma day is sized for a market that does not exist.
  5. 0:33The asymmetry that matters. Surviving is a precondition for everything else. Ruin is not recoverable.
  6. 0:41Size so the unlikely day is survivable.
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Educational content only. MadStockAlerts provides market commentary, research, and educational content. It is not personalized investment advice, and nothing here is a recommendation to buy or sell any security. Trading and investing involve substantial risk, including loss of capital. See the Risk Disclosure and Customer Agreement.
Educational content only. MadStockAlerts provides market commentary, research, and educational content. It is not personalized investment advice, and nothing here is a recommendation to buy or sell any security. Trading and investing involve substantial risk, including loss of capital. See the Risk Disclosure and Customer Agreement.
The Events the Model Says Cannot Happen — MAD Academy Training Video · MadStockAlerts