Just because events are unlikely to happen doesn’t mean they won’t happen.
That’s the message of Deutsche Bank’s special report “13 Outliers For 2013.”
When thinking about the year ahead, it is tempting to extrapolate the recent past whether looking at risks or one’s base case. Moreover, there is a tendency not to deviate too far from consensus, perhaps seeing safety in being part of the herd. From a statistical perspective, this is very similar to assuming markets follow a normal or Gaussian distribution. That is, markets are well behaved and extreme outcomes are rare. The financial crisis of 2008 taught us otherwise, yet it is very difficult to shrug off the bias to assume normality in markets.
The report of included this chart of 3 standard deviation (i.e. very rare) moves in the markets:
Photo: Deutsche Bank