From: John Conover <john@email.johncon.com>
Subject: U.S. recovery: Recession is certain, economists say
Date: Thu, 20 Sep 2001 22:53:44 -0700
Certain is a big word. The US equity markets, with all the negative
sentiment in the media, are not doing that bad-at least considering
the difficult circumstances of the immediate past.
More than 6,000 soles perished in the WTC attack. That would make
September 11, 2001, the bloodiest day in American history, (replacing
the battle of Antietam, September 15, 1862, in the US Civil War-in
which it is estimated that about 6,000 were killed, also.)
Considering the US to be about 4 centuries old, or about 146,000
days, with two catastrophic instances of at least 6,000 soles perishing
in a single day, which would represent a probability of 2 / 146,000 =
1.37E-5; i.e., the WTC attack was about a 4.2 sigma catastrophe.
Since the standard deviation of the increments in an equity index is
about 2% per day, and if the increments are statistically independent,
(a reasonable assumption,) then in four days the standard deviation
of the value of the index would be 0.02 * sqrt (4) = 4%, (meaning that
in any 4 day interval, an indice would be within +/- 4% of its
starting value, 68% of the time.)
The market's reaction, at the end of 4 days to a 4 sigma event, would
be about 4% * 4 = 16%, meaning that for 84% of the 4 sigma catastrophic
events, the market's reaction would be to drop less than a 16%, and for
16%, they would drop more.
Since the markets opened on Monday, the index values have dropped about
12% in the last four days.
So, the markets, although significantly down, are reacting a little
better than would be expected to the catastrophe of September 11,
2001.
John
BTW, this does not mean that a recession is not imminent-it might be,
and might not. Such things are unknowable.
http://www.infoworld.com/articles/hn/xml/01/09/20/010920hnrecession.xml
--
John Conover, john@email.johncon.com, http://www.johncon.com/