Black Swan theory and Indian Stock Markets

What is Black Swan Theory ?

The Black Swan theory refers to a large-impact, tough-to-predict, and rare event beyond the realm of normal expectations. The term Black Swan comes from the assumption that 'All swans are white'. In that context, a black swan was a metaphor for something that could not exist or not possible.

The "Black Swan" theory refers to events of large consequence and their dominant role in history. Black Swan events are a special category of what is called outliers.

What has got Black Swan theory got to do with Indian Markets now?

The Indian Stock Markets hit the upper circuit of 10/15/20% which hasn't happened before. This is a Black Swan Event, a rare event - no one expected. Particularly this is a Black Swan for the bears since markets have hit lower circuit many times before, but not the upper circuit.

Identifying a Black Swan Event.

1. The event is a surprise.
2. The event has a major impact.
3. After the fact, the event is rationalized by hindsight, as if it had been expected.

Another example of a Black Swan Event - Your stock broker gives a buy call and it works :)
If come to know any such events post it in the comments section.

Source: http://www.masterandstudent.com

Nifty Crash 2012

Nifty Crash 2012

The country's leading stock exchange NSE was halted for a few minutes due to a crash of 1000 points in the S&P CNX Nifty, hitting a low of 4888 intra-day. Many of the Nifty stocks were down anywhere between 15-20%. As per NSE India website the circuit breaker rules (upper circuit and lower circuit) are as follows:

Index-based Market-wide Circuit Breakers:
The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%.In case of a 20% movement of the index, trading shall be halted for the remainder of the day.

Since the index showed a downward movement of about 20%, the nse was closed and rightly so. But surprisingly, the exchange was re-opened in few minutes, citing reasons of erroneous trades by one of the broker for about 650cr.

From the following table you can check out the lows of index and other nifty stocks below: There were many stocks in the nifty down as much as 15-20% , all were actual trades done during normal market hours and no freak trades which would happen in small-cap or penny stocks.

Such a crash had happened in nifty futures a few months ago, for which the reason attributed was algo trading, but this one was a manual execution of orders. Considering market at these higher levels, big selling could be anticipated if not such a one. Traders should be aware of such events and use proper risk management systems to protect their trading positions. Had the markets been frozen and closed for the day it would have been a black swan event and if you wonder what's this black swan is all about, you can read about it here at Black Swan Theory. 

Source : http://www.masterandstudent.com/