The Demons Were Real: Monday’s VIX Carnage And The 13-Sigma Event

The Demons Were Real: Monday’s VIX Carnage And The 13-Sigma Event

And so, legions of retail investors, hordes of previously cock-sure newly-minted "money managers", and scores of popular pundits who swore to you they knew what they were talking about, are left to ponder the stark reality of a market structure-driven nightmare scenario. Turns out, the whole VIX ETP rebalance risk was a real thing (who knew?!) and not only that, the knock-on effect for the systematic/programmatic crowd was real too. Go figure. Who could have predicted that? I mean, besides ever
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8 thoughts on “The Demons Were Real: Monday’s VIX Carnage And The 13-Sigma Event

  1. Can we agree that the use of sigma in the context of a standard-normal Gaussian distribution – basically how it is universally used on Wall Street – is complete and utter garbage and only useful for Joe Schmoe manager of a widget factory and MBA students being drilled for their first stats test? Explaining something as a 13-sigma event (and this is not specific to your article H, as I understand you’re using the parlance of “the street”), something with such a minuscule likelihood that it could reasonably be expected not to have occurred once in the history of this universe, in the context of a completely expected occurrence (to anyone who was paying attention) is patently absurd.

    You can pin wings to the back of a pig and call the pig a bird, it doesn’t mean that pig is a bird and you’ve gained any insight into the workings of the pig because you’ve previously observed the habits of birds.

    1. Ha ha! The guy is telling you that, yes indeed the tail can and will wag the dog with these leveraged derivative products, and you wanna pick nits over *how* it is described rather than the utter mind-blowing significance of what it is describing.

      1. roberto… IMHO…
        It wasn’t mind-blowing; I expected it w/o knowing when.
        It was built in. The significance to me is:

        1. The particular “vector” taken to get there.
        2. The actual teaching event, again – inevitable, that Wall St. will build pos-feedback mechanisms that blow up (by definition), given the means & motivation. It won’t stop.
        3. That the same are so monumentally ill-suited and incompetent by license and ignorance – and greed. That won’t stop, either.

        Journeyman is correct. Part of the hubris & incompetence is applying the blather of terms like “sigma”, pseudo-intellectually, part of the fallacy of option pricing to begin with.

    2. Sigma is just sigma. It has a formula, and implies nothing about the underlying distribution. That a 13 sigma event occurred, implies one of the tails of the underlying distribution is morbidly obese. Thus, pointing out that something is a 13 sigma event is very useful.

  2. Sometime last year, you mentioned how such an event as occurred yesterday could trigger a cascade of algorithmic selling, multiplying a 5% market drop into a 20-30% drop. Things seem a bit quiet today. Do you have any update on that thesis?

    Asides, I just want to say how much I appreciate your blog. I am by no means a finance professional and I consider myself fortunate to be able to learn from you.

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