Time to see models and shocks for what they are
The Swiss franc surge on January 15, when the central bank abandoned its peg to the euro, revealed continuing confusion about the role, the value and the limitations of models, says David Rowe
Some events elicit very revealing reactions. One such was the mid-January surge in the Swiss franc exchange rate versus the euro. It followed the decision by the Swiss central bank to abandon the pegged rate it had maintained since 2011. Some will recall a comment in August 2007 by David Viniar – then chief financial officer of Goldman Sachs – that one of the bank's funds had fallen victim to the impact of "25-standard deviation events several days in a row". Clearly the urge for self
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