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Strategies & Market Trends : Cents and Sensibility - Kimberly and Friends' Consortium -- Ignore unavailable to you. Want to Upgrade?

To: Kimberly Lee who wrote (18863)	10/14/1999 11:19:00 PM
From: stan s.	Read Replies (1) \| Respond to of 108040

What's the guy do, recycle speeches? The first part an excerpt from the August 27 speech on y2k.... I knew I'd heard this before!! I guess the new bit about the banks setting aside extra money for market tanks is the catalyst for potential fears this time. And yes I do have a life. <g> From August 27. If episodic recurrences of ruptured confidence are integral to the way our economy and our financial markets work now and in the future, it has significant implications for risk management and, by implication, macroeconomic modeling and monetary policy. Probability distributions that are estimated largely, or exclusively, over cycles excluding periods of panic will underestimate the probability of extreme price movements because they fail to capture a secondary peak at the extreme negative tail that reflects the probability of occurrence of a panic. Furthermore, joint distributions estimated over periods without panics will misestimate the degree of correlation between asset returns during panics. Under these circumstances, fear and disengagement by investors often result in simultaneous declines in the values of private obligations, as investors no longer realistically differentiate among degrees of risk and liquidity, and increases in the values of riskless government securities. Consequently, the benefits of portfolio diversification will tend to be overestimated when the rare panic periods are not taken into account. This is from tonight's speech.... Nevertheless, if episodic recurrences of ruptured confidence are integral to the way our economy and our financial markets work now and in the future, the implications for risk measurement and risk management are significant. Probability distributions estimated largely, or exclusively, over cycles that do not include periods of panic will underestimate the likelihood of extreme price movements because they fail to capture a secondary peak at the extreme negative tail that reflects the probability of occurrence of a panic. Furthermore, joint distributions estimated over periods that do not include panics will underestimate correlations between asset returns during panics. Under these circumstances, fear and disengagement on the part of investors holding net long positions often lead to simultaneous declines in the values of private obligations, as investors no longer realistically differentiate among degrees of risk and liquidity, and to increases in the values of riskless government securities. Consequently, the benefits of portfolio diversification will tend to be overestimated when the rare panic periods are not taken into account.