On December 1 ’08 SPY fell 9.6 % (log return), the biggest daily drop since Black Monday in 1987.
Figure 14 shows a super-exponential increase in (Normal Distribution Implied) PStress leading up to the December 1, 2008 stress event. Note the log scale, so any increase above linear is super-exponential.
The following is noteworthy:
1. On February 27, PStress jumped by 170x from extremely low levels. It was a Black Swan. PStress (i. e., equity market volatility) had no predictive power. However, the extremely low level of volatility/implied stress could be viewed
as a contrarian signal of high hidden risk and risk myopia/overconfldence as discussed earlier.