Historical Black Swan that changed the world economies – Complete details Regarding Black Swan events
Have ever heard the word, Black Swan? The word is rarely used to define unpredictable events in the past. The term has its own history and in this article, we will go through the details about the black swan events and the effect it has on the world economies. And also the list of black swan events that happened in the history.
Black Swan Theory
The theory of Black Swam was first coined by Nassim Nicholas which is termed to use for the events that occur in surprise but has an unpredictable effect. Most of the times the events are recognized only after it has happened and the effects have occurred. The perception of occurring of black swan will never happen.
The theory was developed by Nassim Nicholas Taleb to explain:
- The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.
- The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).
- The psychological biases that blind people, both individually and collectively, to uncertainty and to a rare event’s massive role in historical affairs.
During the occurrence of the black swan the world becomes stumbled, the world economies collapsed during most of the historic black swans and the events left many lives standstill. The Black Swan Events are random and unexpected but will remain in history as a black spot that can never be erased with ease. The event teaches us a lesson, leaves a scar on our history and makes us be prepared and protected for any such occurrence in the future.
How to Identify the Black Swan Event
History teaches us many events that come as a surprise. But can we name all such events as Black Swan. If it so then the list goes long and the word has no specific importance.
But not all the events are termed as black swans. To Identify as a Black Swan there are three conditions that need to be satisfied by the event. Based on the Author the following criteria have to be met.
- The Event is a surprise to the observer
- The Event has a major Effect
- After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected; that is, the relevant data were available but unaccounted for in risk mitigation programs. The same is true for personal perception by individuals.
Based on the above criteria only a few events can be termed under Black Swan Events.
Historic Black Swan Events
Here is the list of events in the history that are termed as Black Swan Events by the World.
1. 1997 Asian Financial Crisis
This is event is a series of occurrence of currency devaluations of some of the major Asian countries starting with Thailand. During this event, the Asian currencies fell by almost 38% and stock markets in the regions fell by almost 60%.
The event come to a the end with the staggered growth of Asian Countries including Thailand, Malaysia, south Korea, Philippines, Singapore and Indonesia.
The tipping point for the event is the unstable property market in Thailand. During this period large inflows of foreign direct investment are seen in the Asian market, which resulted in the soaring of real estate prices, and large investment in the infrastructure development from the public debt.
When the currencies have been devalued massively to stabilize the economy, the IMF has to step in to save the economies from the trap. It has given short term loans of about $110 billion to these nations with strict conditions such as Higher taxes, reduced public spending, and privately-owned companies.
2. 2000 The DOTCOM Crash
This was the time when the internet is being penetrated to the world is happening and many tech giants are emerging. During early 2000s, many tech companies were started using the tools of the internet.
The bubble of tech giants have been spread and the companies have been overvalued based on speculations and unreliable data. This classic case reveals what happens when companies were valued with no proper analysis and backing data. The investor has have put in a lot of the money into these tech giants with overvaluing most these companies.
But when the companies started to show losses and it became visible that that valuation of companies is not is believed to be the markets crashed. There are many cases of companies that failed to face the market and the lots of investors money have been lost. When the picture is becoming clear the market reacted to it very soon and the markets crashed. NASDAQ has lost a composite of 78% and billions of investors money have been lost.
3. Crash of 9/11
This event affected the world not only on financial point but made the world loose lives of many people. The attack on Twin Towers of the World Trade Centre is a topic of debate for many years. On September 11, 2001, the twin towers were attacked and the world markets were in a shock. The event made NASDAQ and NYSE shut down for the day. The markets responded to the event on the first trading day of that week and as expected the markets crashed and with a span of 1 week $1.4 trillion of investors money were lost in the stock market.
It was the time markets are slowly recovering from the dotcom crash and this came as a big blow to the markets. The markers were dropped with the largest closure with a stop has been put to prevent further chaos in the markets and prevent panic selling. On the first day, NYSE lost over 7%.
4. 2008 Global Financial Crisis
Probably this was one of the most talked topics in the financial world. This event in history is the result of a bubble collapsing. This event is the most notorious and most famous meltdown in recent times.
The biggest catalyst was the sub-prime mortgages that were doled out to people with questionable credit, leading to an unsustainable housing market bubble which ultimately popped. The reckless lending by the financiers was considered to be the main reason. The federal reserve is in the picture before and after the effect.
In Mar 2008, Bear Stearns realized that it had accumulated bad assets and approached JP Morgan for a bailout which agreed only on a sovereign guarantee of $30 billion by the Federal Reserve.
In September 2008, Global investment bank Lehman Brothers filed for bankruptcy, is the biggest bankruptcy in history. This triggered the event further. Over 25,000 Lehman employees went jobless and more than $46 billion of Lehman’s market value was wiped out. In total, over $10 trillion was eventually wiped out in the global equity markets.
These are some of the events that are considered to be the black swan events in the history. There are other events considered as Black swan events. they are
- 2009 European Sovereign Debt Crisis
- 2001 Fukushima Nuclear Disaster
- 2014 Crude Oil Crisis
- 2015 Black Monday China
- 2016 Brexit
As we have seen that Black Swan Events teach the markets of the world an important lesson. But the markets face a hard time recovering from the crisis. Black swan events are a scar on the history of the worlds. with the events being unpredictable, we can never stop the occurrence of the events But we can become resilient and can sustain such events if occur we equip ourselves.
These events in all cases have the worst effect on the financial market. with the term coined to describe the events that affect the financial markets. Hence the investor look for the patterns in these events and those teach a lot about the history of the global financial markets.