Everyone saw white swan but black swan is a very rare same concept is in the stock market. In simple terms, we can say events that are very rare or accidentally happened in the stock market called as black swan events.
Background of the Black Swan event concept.
The concept of the black swan event was developed by format wall street trader Nasim Nicholas. Nassim Nicholas is a former options trader and risk analyst. The whole concept of Balck swan in the stock market is explained in the book The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas.
As per Nassim Nicholas events that are unpredictable and rare consider as black swan events.
Characteristics of Black Swan Event
- Events that are unpredictable,
- Events that are rare.
- Mostly negative impact on the stock market.
- After the occurrence of a black swan event, people will rationalize the event as having been predictable (known as the hindsight bias).
What is the effect of the Black Swan Event on the Stock Market?
Black swan events are considered as a bad event for the stock market so it’s a negative impact on the stock market.
What are the past Black Swan Event?
1. The Dotcom Bubble
The Dot-com bubble was a stock market bubble that happened in 1990 because of high speculation in Internet-related companies. Everyone was investing in internet-based companies without checking the fundamentals of companies. When companies failed to perform as per expectations selling pressure came in the market that leads to a heavy downfall in the market.
2. 1997 Asian financial crisis
In 1997 because of currency devaluation and other economic reasons in Asian countries (mainly Thailand) financial crisis arises. Asian currencies depreciated mode than 30 % and international stocks down more than 55 %.
3. November 2011 Attacks
The 9/11 attack also unpredictable and rare that happened on the Twin Towers of New York’s world trade Center. Because of this attack, approximately $ 1.4 trillion in the stock market value lost within a week.
4.Lehman Brothers Bankruptcy
In 2008 Lehman brothers bankrupt because of the global financial crisis. Because of this, more than 25000 employees went jobless and more than $ 45 billion of Lehman brothers market value was wiped out.
In 2016 because of Brexit decisions wiped out $ 2 trillion approximately of value in the global markets. That event is also rare and unpredictable.
COVID- 19 also we can say black swan event. Because of the coronavirus pandemic, many countries entered into recession. The Indian market also down more than 40% in the starting phase. COVID also an unpredictable event and that directly impacted on the world economy.
How to protect from Black Swan Events?
Portfolio diversification is one of the best ideas to reduce risk in this type of situation. If we check in Coronavirus situation equity market worst affected but same time bond market and bullion market given positive return. Investors can invest in fundamentally strong companies that have a faster chance of bounce back if the market recovers.
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