Calculating the Risk of a Stock Market Crash

แชร์
ฝัง
  • เผยแพร่เมื่อ 20 ธ.ค. 2024

ความคิดเห็น •

  • @asherfatin7899
    @asherfatin7899 หลายเดือนก่อน +28

    Completely fair points. Always worth remembering that these traditional financial models are just that - models. They do not claim to be an entirely accurate reflection of reality. They are there to simplify the world around us. Them being incorrect sometimes doesn't make them bad models, it simply suggests that we need to use more than just one model to get a wholistic view of the world.

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน +10

      Yeah that is absolutely spot on - the bigger risk is around people who don't understand that's what models are for - diversification models caused the GFC! Anyone thinking seriously about the assumptions in those models should have seen the problem straight away! Thanks again!

  • @earlgrey6589
    @earlgrey6589 หลายเดือนก่อน +33

    Politics breaks all models. Politics can juice or drain the markets faster than a mathematician can form fit their model to “rationally” explain it

    • @HX3ne
      @HX3ne หลายเดือนก่อน +2

      Politics don’t have as much as of an impact as you make it seem. Why are you so convinced of this?

    • @julioperez-delgadojr2976
      @julioperez-delgadojr2976 หลายเดือนก่อน

      ​@@HX3ne because even when everithing is fine, theyll go on the news and say stuff is going bad and bam the stocks drop.. its all manipulated.

    • @trevorjones3530
      @trevorjones3530 หลายเดือนก่อน +7

      ​@@HX3ne...when China try to seize Taiwan...you will see an epic drop in markets worldwide...that is why you should always keep an eye on politics.

    • @Slimburger24
      @Slimburger24 หลายเดือนก่อน +4

      There’s also emergent behavior of communities and their knowledge creating force against momentum, the market is a mix of feelings, ambitions, and self-fulfillment/sustanance against the norm or momentum or for it when the next change is deemed “too dangerous for everyone or a influential community” or it just is.
      Player run economies in video games may not be real but are some of the best experiments to yielding close to life results as it simulates emergent behavior.
      lies, blind experiments, and complete are debt and fragile to uncontrolled feelings and independent thought, emotional truth runs off of momentum and past experiences until it gets boring.
      Some may disagree cause some of us go with flow or like to start something new and has the emotional momentum or experience to back it. When commonly is close to met in pains and solutions then it gains size and force and can combine further with others on its same level to produce a broader activity and continues on steps from a micro level to a macro level.

    • @Arathreas
      @Arathreas หลายเดือนก่อน

      ​@@trevorjones3530it's actually irrelevant. All that matters are liquidity and credit. It's literally what all crashes have in common. From the great depression to the gfc. However, yes, real events can impact liquidity and credit.

  • @rydoes1225
    @rydoes1225 หลายเดือนก่อน +1

    Hey mate! Your channel was recommended by a friend of mine who I consider to be absolufely brilliant.
    I am VERY new to finance and data and found all of the information on your channel extremely insightful and digestible.
    Him and I are also POLAR opposites in how we perceive a lot of things.
    The fact that both of us has been able to find a lot of value in both whay you present and how you present it is really awesome.

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      Thank you so much for saying so - I try to be useful with these videos if I can! Good to know they are appreciated!

  • @alexisdamnit9012
    @alexisdamnit9012 หลายเดือนก่อน +4

    From a statistician's perspective, this is an example of misusing statistical models. Statistical models operate best when statistical criteria are met - however, in the real world (e.g. finance) data is often wildly inconsistent with those stochastic requirements and therefore likelihood estimates can be wildly off. See work by David A. Freedman (Statistics, UC Berkeley) for example of criticisms.

  • @jaspy.865
    @jaspy.865 หลายเดือนก่อน +2

    bro I have been learning of Mandelbrot for a minute, along with Goldbach, hearing you mention Mandelbrot in the markets is amazing to me, its the first time I've heard anyone in the markets mention it, is there any chance you can touch more on how these might align with the market?

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      Yeah it's amazing to me too that all these gold nuggets from Mandelbrot don't get mentioned often! That's why I like talking about this stuff, especially as I found it fascinating when I was doing my PhD on fractals. I'll try to align this more with markets, in as far as that is possible. What were you thinking would be good to see?

  • @sostafmeh
    @sostafmeh หลายเดือนก่อน +2

    TLDR: The video discusses the limitations of using the Gaussian distribution (or normal distribution) in financial modeling, particularly in assessing market risks. While this model is popular due to its mathematical simplicity and historical convenience, it fails to account for extreme market events, which have occurred frequently in history, such as the crashes of 1929 and 2008. Benoit Mandelbrot's work highlights that financial markets exhibit "wild randomness" and clustering of price movements, suggesting that large drops are more common than traditional models predict. He advocates for the use of fractal mathematics to better capture the complexities and unpredictabilities of financial markets, arguing that existing models significantly underestimate risk. Ultimately, Mandelbrot calls for a revolution in finance to adopt models that reflect the chaotic nature of market behavior rather than oversimplifying it.

  • @boccobadz
    @boccobadz หลายเดือนก่อน +12

    People aren't rational therefore markets aren't efficient. It's just that simple. And massive dumps in negative gamma territory are relatively normal, that's how derivatives work.

    • @chodori2041
      @chodori2041 หลายเดือนก่อน

      Irrationality isn't the problem. It's that economic models like EMH have a warped definition of rationality that in no way reflects how market participants operate.

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน +1

      Tend to agree that people aren't rational! :)

  • @Three.Six.Nine.
    @Three.Six.Nine. หลายเดือนก่อน +3

    Glad you're back man

  • @zzzoldik8749
    @zzzoldik8749 22 วันที่ผ่านมา

    I have been look your chanel, yet I never got any information directly usefull for my trading, could you show how you trading or what is the formula for chaos and fractal that can we use in trading?

  • @SP_Saga
    @SP_Saga หลายเดือนก่อน

    Great perspective. Thank you for sharing!

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      Thank you!! Glad you enjoyed it

  • @vraxo8953
    @vraxo8953 หลายเดือนก่อน

    Does the options market use normal distributions for how they think the markets gonna move?

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      I do know that these days at least some (and probably most) serious traders (i.e. in banks and other financial institutions) would be taking into account fat tails, though I think often this is done by tacking on fixes to the BS equation to take these into account. I think Mandelbrot would likely say these are very mathematically inelegant. Also, I wouldn't necessarily trust that they are doing it well (and possibly not at all!), but who knows.

  • @djayjp
    @djayjp หลายเดือนก่อน +1

    0:31 That looks like an -88% drop...!

  • @wickjon1844
    @wickjon1844 หลายเดือนก่อน

    0:19 According to traditional financial models...
    Which financial models? reference link?

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน +4

      Thanks for your comment and that's a good point. I'm largely commenting on and simplifying Mandelbrot's work here, but what is being referred to are things like the original Black-Scholes Model and Louis Bachelier's models, and things like Modern Portfolio Theory and Value at Risk when a normal distribution is assumed. Traditional in the sense of "pre-fractals and fat tails", but any model that assumes a normal/lognormal distribution. That's not to say that none of these have ever been modified to incorporate Mandelbrot's ideas (his book was written in 2004), but I've rarely seen the ideas around fractals and fat-tails discussed outside of academic papers, though I'm sure smart quants use them in various ways. That's why I think it's useful to make videos about this. It's also a further response to Veritasium's very good video (The Trillion Dollar Equation) which I discuss in another video, which is about the Black-Scholes-Merton Model, but has a (quite cool) visualization of price movements being normally distributed.

  • @guanxichen4400
    @guanxichen4400 หลายเดือนก่อน

    Intriguing video!
    one of the first things in math that fascinated me was the Mandelbrot set and fractals.
    and i am very interested in macro economics and finance.
    how did you and where can i learn more about these 2 topics, together?

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      From doing a PhD which made heavy use of fractals for geophysical data. But I was always interested in how these applied to finance, especially as this was something that Mandelbrot focused on, and did a little work on estimating derivative contract values. I'd suggest Mandelbrot's book, and anything you can find on multifractals would be most useful to learning this area.

  • @canadianstacker
    @canadianstacker หลายเดือนก่อน

    The market values are held up by pump & dump schemes & hot air. So when a balloon deflates what do they expect?

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      Balloon popping might be a better analogy! :)

  • @jab16399
    @jab16399 หลายเดือนก่อน +1

    The main reason stocks go up is the devaluing of currency. It is mostly just the effect of printing money.

    • @gentronseven
      @gentronseven หลายเดือนก่อน

      I partially agree with you but it is more simple and more complicated. The reason stocks go up is because people want to buy them - so if you're going to find a model for calculating expected price or behavior it has to measure how much people are wanting to buy stocks. There are many examples where inflation is increasing heavily and people aren't buying markets and examples where there is no monetary inflation and markets still are holding up - for instance, right now the money supply is not increasing anywhere near as rapidly as the stock market has gone up. There are many examples where newly created money causes market bubbles because more emphasis is placed on the stocks people are excited about rather than broadly throughout the economy. The problem is that Nvidia doesn't sell AI without capital flowing into the rest of the economy, so they have likely received tons of investment for long term products that will never actually sell in the next year or two. The reason it went up is because people have lots of extra money from the inflationary time, they used it on nvidia expecting higher future returns but not on the Russell 2000, small and mid cap stocks who would buy nvidia's products and need investment capital in order to do so, and so once this issue is realized capital will likely flow out of nvidia and other tech companies because they are producing long duration efficiency related products for a market not actually able to produce anything. Prices will fall when and if that becomes evident and the government will likely restart the inflationary bust, investment into long duration goods while ignoring shorter duration goods is actually what has caused every economic cycle because consumer focused demands should drive the long duration demand, not the other way around, and that distortion is what causes the business cycle. IE, the realization that more factories, more banking, more AI, more internet etc was not actually demanded by the market. Companies don't exist in a vacuum.

    • @stevenlarson3316
      @stevenlarson3316 หลายเดือนก่อน

      Since 1925, while inflation has increased prices by about 18 times, the stock market (S&P 500) has grown by nearly 19,888 times nominally, or about 1,103 times when adjusted for inflation, significantly outpacing the erosion of purchasing power.
      Inflation has an effect, but it's not the driving factor.

    • @paulnyagini
      @paulnyagini หลายเดือนก่อน

      ​@@stevenlarson3316 maybe inflation is not the one.
      Honestly I will say is greed.......of returns.
      The markets should be correlated with the money supply.
      If you look at 1999 the ratio of market cap on money supply was at his high 316% .
      To is standing at 235% if iam not mistaken if let say it reach 500% it will mean a 20% dump of stock will be enough to cose a financial crisis.
      But will all know that most of primary market markers use credit to create liquidity in the markets .
      The US. Money supply stand at +26trilion if you divide it with 350milion people you get around 74,000 usd . If all people decide to save 100,000 USD they will be a financial crisis. Weird HAAA.
      And I wonder why people complaining that there is too much money in the circulation.
      To simplify.
      If most of the stocks are holded by market markers then for sure the stocks will be going upwards rapidly but if most stocks are holded by investors then the stocks will be going up slowly due to liquidity factors with money supply.
      Imagine you wake up one day and find out that total US market cap is +100trilion that is just 98% growth which could be 10yrs from now if we are lucky. How much money supply would be in the economy?
      Another quick note...............
      If money supply increase then it means more loans are been issued than being paid. And vis Vasa.
      The problem is mathematics and realistic impossible to clear all dept due to the interest more likely the debt is huge than the cash needed to clear it.
      The system was rigged even before the US economy existed.

  • @Brumor
    @Brumor หลายเดือนก่อน

    I was wondering if you'd be back! :) Great video as always!

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน +1

      Thanks @Brumor - super pleased that you took the time to comment!! :) I'd just been very busy but I enjoy making these so was always going to at some point. Thanks again!!!

    • @Brumor
      @Brumor หลายเดือนก่อน

      @@fractalmanhattan No pressure, your videos are awesome! :D

  • @doctoruttley
    @doctoruttley หลายเดือนก่อน

    Awesome video! A+ 👌🏻

  • @frankovercrest2317
    @frankovercrest2317 หลายเดือนก่อน

    Any opinion on the austrian theory of the business cycle?

    • @joshuarasmussen641
      @joshuarasmussen641 หลายเดือนก่อน +1

      Yeah it doesn’t represent reality of the economics and markets of today, that’s my personal opinion, with strong conviction.

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน +1

      Specifically that theory? Not sure - but I think monetary policy often goes flaky for various reasons and can cause the problems it's meant to cure. Perhaps a rethink is needed?

  • @HX3ne
    @HX3ne หลายเดือนก่อน +1

    EMH and random walk theory is stupid easy to disprove. How would hundreds of patterns exist and play out with probabilities higher than 50% if the markets are truly random? This has always been such an ignorant approach to the markets.

  • @wealthelife
    @wealthelife หลายเดือนก่อน

    So, the normal distribution is only a rough approximation that works 'most of the time' but the more accurate distribution model has no predictive power (and the timing and extent of 'clusters' and/or the size and timing of 'black swan' events is unknowable). Interesting, but not particularly useful in terms of making investment decisions (aside from always remembering that the lower bound of performance is -100% (and you should avoid gearing, so that it is never MORE than -100%!).

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      I'd mostly agree that we're kind of stuck with investing in something, and stocks are often the best option. I think though properly understanding the risk has a lot of benefits, as not everyone is in a position to wait out any downward turn the market might take, especially if it's a serious one.

  • @JJMGFX-94
    @JJMGFX-94 หลายเดือนก่อน +2

    Ok there is not risk just buy anything with not stoploss, i dont even know why we have the sell button

  • @djayjp
    @djayjp หลายเดือนก่อน

    Yep, normal distribution (though skewed) with fat tails 👍

  • @flow5718
    @flow5718 หลายเดือนก่อน +3

    The only time you average down with everything you've got including the house and the kids is in an index fund when the market's crashing. Or even better, wait for it to bottom out, go up, do a little retracement breather and go all in like a degenerate gambler.

  • @JasonAmir-qo4uo
    @JasonAmir-qo4uo หลายเดือนก่อน +8

    Traditional financial models seem outdated, failing to account for complexities like fat-tail risk and clustered price movements, as highlighted by Benoit Mandelbrot's fractal theory.

    • @John-ww2fv
      @John-ww2fv หลายเดือนก่อน

      Exactly! Mandelbrot's research shows how clustered price movements. increase crash likelihood. We need to rethink our risk assessment, considering factors like inflation, interest rates, and geopolitical tensions.

    • @ThomasColt
      @ThomasColt หลายเดือนก่อน

      I've seen it firsthand. Black Swan events, like the 2008 financial crisis, can devastate portfolios. Diversification is key, but it's challenging to balance risk and returns.

    • @JasonAmir-qo4uo
      @JasonAmir-qo4uo หลายเดือนก่อน

      But finding the right balance is tricky, especially with the rise of alternative investments like cryptocurrencies and ESG funds.

    • @OwenFlex
      @OwenFlex หลายเดือนก่อน

      That's why working with a CFP can be beneficial, especially when navigating complex investment options like cryptocurrencies and ESG funds

    • @ThomasColt
      @ThomasColt หลายเดือนก่อน

      Yeah, I went through something similar. An advisor helped me navigate crypto and ESG, now I'm loving the returns.

  • @tucker5720
    @tucker5720 หลายเดือนก่อน

    Good video!

  • @owendavies8227
    @owendavies8227 หลายเดือนก่อน +1

    Good points. I personally use the 1/(1+x^2) curve instead of the normal curve when I *absolutely have to* map it to a mathematical distribution. A weibull is sometimes also OK. I usually just look at histograms directly with my eyes since that works just fine 90%+ of the time. The curve is a little lobsided and not very pretty, unfortunately. But, I still like it despite its flaws. My favorite way of measuring risk is a "risk of losing $X" assessment based on past data. However much money you can't afford to lose, you invest in a way that the risk of losing it is negligable over the long run.

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      Those are really good points too @owendavies8227!!

  • @Arathreas
    @Arathreas หลายเดือนก่อน

    The problem is, models assume the financial markets are rational. They aren't. They are irrational.

  • @connorskudlarek8598
    @connorskudlarek8598 หลายเดือนก่อน

    The efficient market hypothesis is pretty well debunked simply because it assumes actors are acting rationally.
    You ever have a friend who says, "I always predict wrong, so instead of following my advice I go in the opposite direction." This isn't rational. The rational thought is to recognize that something about your prediction method is wrong and thus cannot be trusted (including trusting it to be wrong).

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      Absolutely agree that the assumption of rationality that sits behind the EMH is hugely flawed

    • @stevenlarson3316
      @stevenlarson3316 หลายเดือนก่อน

      Even if you assume rationality, you still can't rely on the wisdom of the crowd all the time. The crowd is susceptible to groupthink.
      Things that sound right but are actually counter intuitive almost always catch the crowd offsides.
      Often times individuals in a crowd are incentivized to act irrationally to remain with the crowd.
      In a panic you don't want to be going in the opposite direction. The same is true when the market is overconfident.
      This can lead to the crowd self-censoring, dissenting opinions can be drowned out or forcibly silenced because no one wants to rock the boat.
      There's always a tipping point that can't be determined ahead of time where the crowd collectively decides it's wrong and it often the timing doesn't seem rational. It doesn't coincide with a catalyst or news because the change is actually happening within the group as information and opinions spread. That's much more difficult, if not impossible to model accurately. Market Exit had a great video on this.
      th-cam.com/video/hcmbATnQcMo/w-d-xo.html

  • @domenjurjevic7876
    @domenjurjevic7876 หลายเดือนก่อน

    Efficient market hypothesis has been disproven

  • @jjoonathan7178
    @jjoonathan7178 หลายเดือนก่อน

    but stonks only go up :o

  • @mart34
    @mart34 หลายเดือนก่อน

    The NHS is dead. It can barely function nowadays. I can't help but think it has prioritized its internal hierarchies and procedures, existing to serve itself, instead of providing an efficient and quality medical service to the public.

  • @hassanj1861
    @hassanj1861 หลายเดือนก่อน +1

    Stopped listening when economics are tryed translated to Math....
    The common sins for ecnomists, they try to make their field relevant, when its is a human thing and psychology.
    Its a reasson engineers and ecnonomist is seperated in universty with engineer math and dumb math.

    • @fractalmanhattan
      @fractalmanhattan  หลายเดือนก่อน

      hee hee, yeah. I've heard it called physics envy as well :)

  • @aaronhpa
    @aaronhpa หลายเดือนก่อน +2

    You said nothing in 8 minutes... Pump up the level bro

  • @mininigenovesi7333
    @mininigenovesi7333 หลายเดือนก่อน

    Use technical analysys and stops and your investments will be fine

    • @smetljesm2276
      @smetljesm2276 หลายเดือนก่อน

      Lol...
      🤪
      Sure