The Black Swan Theory-How to outperform the OMXS30 index by using an investment strategy based on the Black Swan Theory
(2019) NEKH02 20182Department of Economics
- Abstract
- The purpose of this thesis is to answer the question: is it possible to outperform the OMXS30 index by using an investment strategy based on the Black Swan theory? With increased globalization and technological development, the world has become more and more complex and economic models and theories cannot capture all the sources to risk. There are also several limitations to the human mind which make Black Swans unpredictable. There is no clear definition of what a Black Swan is, however, Nassim Taleb (2010) identifies three characteristics: (1) it is an outlier that lies outside of the general expectations (2) it has an extreme and lasting impact and (3) it has not a prospective predictability.
The strategy used in this thesis has its... (More) - The purpose of this thesis is to answer the question: is it possible to outperform the OMXS30 index by using an investment strategy based on the Black Swan theory? With increased globalization and technological development, the world has become more and more complex and economic models and theories cannot capture all the sources to risk. There are also several limitations to the human mind which make Black Swans unpredictable. There is no clear definition of what a Black Swan is, however, Nassim Taleb (2010) identifies three characteristics: (1) it is an outlier that lies outside of the general expectations (2) it has an extreme and lasting impact and (3) it has not a prospective predictability.
The strategy used in this thesis has its foundation in a study done by Estrada & Vargas (2012). In this thesis, a Black Swan is identified as a daily return of 5% or more, in absolute value, of the OMXS30 index. During the evaluation period from 2000-01-03 to 2017-12-29, 38 observations were defined as a Black Swan. Out of these 38 observations, 21 were positive Black Swans and 17 were negative Black Swans. The investment strategy assumes mean-reversion, hence after a negative Black Swan, the five individual stocks with the highest beta value from the OMXS30 will be invested in. After a positive Black Swan, the portfolio will consist of the five stocks with the lowest beta value. The performance of the Black Swan strategy will be compared to the performance of the market index. 1000 SEK at the beginning of the evaluation period resulted in 890. 61 SEK for the index and 3167.24 for the Black Swan strategy. When evaluating performance measures, the Black Swan strategy outperforms the index in arithmetic return, geometric return and risk-adjusted return.
Neither of the two strategies are considered to be normally distributed, which implies problems with using standard deviation as a measure of risk. There is also ambiguously evidence for mean-reversion, implying that the reason behind the success of the Black Swan strategy cannot be determined. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/8968920
- author
- Mattsson, Frida LU
- supervisor
- organization
- course
- NEKH02 20182
- year
- 2019
- type
- M2 - Bachelor Degree
- subject
- keywords
- Black Swan Theory, OMXS30, beta value, mean reversion
- language
- English
- id
- 8968920
- date added to LUP
- 2019-02-15 14:53:28
- date last changed
- 2019-02-15 14:53:28
@misc{8968920,
abstract = {{The purpose of this thesis is to answer the question: is it possible to outperform the OMXS30 index by using an investment strategy based on the Black Swan theory? With increased globalization and technological development, the world has become more and more complex and economic models and theories cannot capture all the sources to risk. There are also several limitations to the human mind which make Black Swans unpredictable. There is no clear definition of what a Black Swan is, however, Nassim Taleb (2010) identifies three characteristics: (1) it is an outlier that lies outside of the general expectations (2) it has an extreme and lasting impact and (3) it has not a prospective predictability.
The strategy used in this thesis has its foundation in a study done by Estrada & Vargas (2012). In this thesis, a Black Swan is identified as a daily return of 5% or more, in absolute value, of the OMXS30 index. During the evaluation period from 2000-01-03 to 2017-12-29, 38 observations were defined as a Black Swan. Out of these 38 observations, 21 were positive Black Swans and 17 were negative Black Swans. The investment strategy assumes mean-reversion, hence after a negative Black Swan, the five individual stocks with the highest beta value from the OMXS30 will be invested in. After a positive Black Swan, the portfolio will consist of the five stocks with the lowest beta value. The performance of the Black Swan strategy will be compared to the performance of the market index. 1000 SEK at the beginning of the evaluation period resulted in 890. 61 SEK for the index and 3167.24 for the Black Swan strategy. When evaluating performance measures, the Black Swan strategy outperforms the index in arithmetic return, geometric return and risk-adjusted return.
Neither of the two strategies are considered to be normally distributed, which implies problems with using standard deviation as a measure of risk. There is also ambiguously evidence for mean-reversion, implying that the reason behind the success of the Black Swan strategy cannot be determined.}},
author = {{Mattsson, Frida}},
language = {{eng}},
note = {{Student Paper}},
title = {{The Black Swan Theory-How to outperform the OMXS30 index by using an investment strategy based on the Black Swan Theory}},
year = {{2019}},
}