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Expected sigma event frequency of S&P 500 daily returns based on historical returns, compared to normal distribution expected frequency.

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Expected Sigma Event Frequency of S&P 500 Returns vs Normal Distribution

Black Swan events are rare and unpredictable outliers that are also referred to as “six sigma events”, meaning six standard deviation events. It is a concept of probabilistic risk modeling and is characterized by a price drop of six times the volatility (standard deviations) of an asset. Volatility is denoted by the lower case Greek letter σ (Sigma).

A six sigma event assumes a 0.000000197% probability of occurrence. In other words once every 1.38 million years.

sigma_frequencies

Image source: Wikipedia

Source: The Probability of Six Sigma Events

The Empirical Rule

The empirical rule, sometimes called the 68-95-99.7 rule, says that for a random variable that is normally distributed, 68% of data falls within one standard deviation of the mean, 95% falls within two standard deviations of the mean, and 99.7% falls within three standard deviations of the mean.

Normal Distribution

Image source: Wikipedia

Source: The Normal Distribution

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Expected sigma event frequency of S&P 500 daily returns based on historical returns, compared to normal distribution expected frequency.

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