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A Simple Theory of the Financial Crisis; or, Why Fischer Black Still Matters
The key question about the current financial crisis is how so many investors could have mispriced risk in the same way and at the same time. This article looks at the work of Fischer Black for
The key question about the current financial crisis is how so many investors could have mispriced risk in the same way and at the same time. This article looks at the work of Fischer Black for insight into this problem. In particular, Black considered why the "law of large numbers" does not always apply to expectations in a market setting. Black's hypothesis that a financial crisis can arise from extreme bad luck is more plausible than is usually realized. In this view, such factors as the real estate market are of secondary importance for understanding the economic crisis, and the financial side of the crisis may have roots in the real economy as a whole.
Citation (Chicago Style)
Cowen, Tyler. "A Simple Theory of the Financial Crisis; or, Why Fischer Black Still Matters." Financial Analyst Journal 65, no. 3 (May/June 2009): 17-20.
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