Coping With Extreme Market Conditions
Though QanSystem is designed to capture the underlying grand structure of market behaviour, it also easily copes with market extremes. In this section we outline the treatment of significant market events that led to catastrophic market losses in the past. It contrasts this with QanSystem’s handling of these conditions.
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Example 1: Lehman Brothers Collapse in October 2008
Financial services firm Lehman Brothers filed for Chapter 11 bankruptcy protection on 15 September 2008. The filing remains the largest bankruptcy filing in US history, with Lehman holding over $600 billion in assets. For months on end financial markets were completely out of kilter, with the climax occurring during the week from 6 to 10 October when market professionals didn’t know any more how to cope with this most bizarre market situation.
Example 2: Publication of the US Labor Market Report in September 2010
Another unique feature of QanSystem is its capability to deal with situations where markets are expected to go down one of two very different paths. To capture this adequately, the use of bimodal distributions is warranted, something that other systems would clearly struggle with.
For example, the publication of the US Labor Market Report on 3 September 2010 was such an event, where the markets almost came to a standstill.
Example 3: Fukushima Tsunami 2011
The earthquake off the Pacific coast of Japan was a magnitude 9 undersea megathrust earthquake that occurred on Friday 11 March 2011. It was the most powerful earthquake ever recorded to hit Japan, and the fourth most powerful earthquake in the world since modern record-keeping began. The earthquake triggered powerful tsunami waves that reached heights of up to 40.5 metres and travelled up to 10 km inland.
Estimates placed insured losses from the earthquake alone at US$14.5 to $34.6 billion.
Events like this typically have huge market implications. Though such events can possibly not be foreseen, what can be assessed, however, is the susceptibility of markets to crash, how far they may fall and how quickly they may recover.
Example 4: Brexit 2016
The Brexit referendum took place on 23 June 2016 to gauge support for the UK either remaining in, or leaving, the European Union (EU). The non-binding referendum resulted in 51.9% of voters voting in favour of leaving the EU.
Financial markets reacted negatively immediately after the result. Investors in worldwide stock markets lost more than the equivalent of US$2 trillion on 24 June 2016, making it the worst single-day loss in history, in absolute terms. The market losses amounted to US$3 trillion by 27 June. The value of the pound sterling against the US dollar fell to a 31-year low. The UK’s and EU’s sovereign debt credit rating was also lowered by Standard & Poor’s. However, by 29 June, the markets had returned to growth and the value of the pound had begun to rise.