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How Unlucky Is 25-Sigma?

Kevin Dowd, John Cotter, Chris Humphrey and Margaret Woods
The Journal of Portfolio Management Summer 2008, 34 (4) 76-80; DOI: https://doi.org/10.3905/jpm.2008.709984
Kevin Dowd
A professor of financial risk management at the Centre for Risk and Insurance Studies, Nottingham University Business School in Nottingham, UK.
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  • For correspondence: kevin.dowd@nottingham.ac.uk
John Cotter
An associate professor and the director of the Centre for Financial Markets at the School of Business, University College Dublin in Dublin, Ireland.
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  • For correspondence: john.cotter@ucd.ie
Chris Humphrey
A professor in the Manchester Accounting and Finance Group (MAFG) at Manchester Business School, University of Manchester in Manchester, UK.
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  • For correspondence: chris.humphrey@mbs.ac.uk
Margaret Woods
An associate professor in accounting and finance at the Centre for Risk and Insurance Studies, Nottingham University Business School in Nottingham, UK.
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  • For correspondence: margaret.woods@nottingham.ac.uk
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Abstract

This article examines the likelihood of high-sigma loss events, paying particular attention to the so-called 25-sigma events which a number of financial institutions have allegedly experienced in the recent financial turmoil. The authors discuss several well-known cases and their media coverage, and then examine the probabilities of such events and the periods of time that would elapse before one would expect to witness them. They find that 25-sigma events are far less likely to occur than recent discussions would suggest—so much so, in fact, that they are literally incredible.

TOPICS: Accounting and ratio analysis, statistical methods

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Vol. 34, Issue 4
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How Unlucky Is 25-Sigma?
Kevin Dowd, John Cotter, Chris Humphrey, Margaret Woods
The Journal of Portfolio Management Jul 2008, 34 (4) 76-80; DOI: 10.3905/jpm.2008.709984

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How Unlucky Is 25-Sigma?
Kevin Dowd, John Cotter, Chris Humphrey, Margaret Woods
The Journal of Portfolio Management Jul 2008, 34 (4) 76-80; DOI: 10.3905/jpm.2008.709984
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