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Views on non-Normal markets [82]

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Bullet points include: Even a model with good back-test properties may fail to model future risks effectively. Because the past is not necessarily a good guide to the future. Markets are not (exclusively) akin to precisely defined external physical systems whose actions are perfectly predictable. Market behaviour includes feed-back loops in which we (the observers) are implicated. Magnitude of impact of a given scenario (relatively) easy to calculate. The challenge is how to identify the scenario’s likelihood. Regulators know this too! Stress testing focuses more on magnitude (if large and adverse), and what makes the scenario adverse, and pays less attention to likelihood

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