Back-test that

May 6 2010.  Dow falls more than 1,000 points intraday, including a drop of P&G from around $60 to (according to some accounts) below $40. The Dow recovered most of the falls quickly, but these trades are now part of the historical time series.

Banks and others using risk management tools often back-test their models against historical data to see how whether the models capture past market movements in estimating potential future market movements. This blip may appear as an anomaly in these tests for some time.

(It’s more typical for the tests to use only closing prices rather than intra-day prices. However, this actually reflects a weakness in the typical models and is only a fortunate escape from today’s problems)

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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