A recent analysis showed a -5% market shock amplifying 3.07x, but this was just the median of a much wider distribution of outcomes. Market predictions need to consider a range of possibilities, not just one number.
Welcome back to WondTech! Remember how we discussed a -5% market shock amplifying to -15.4%, a 3.07x impact? Well, it turns out there's more to that single number. One of our sharp readers raised a super important question: «The aftermath should be non-linear and uncertain — a probability distribution of outcomes, not a single number.» And they were absolutely right!
This week, we got the answer, revealing that the 3.07x amplification we talked about was actually the *median* of a much wider range of potential outcomes. When experts wrapped the underlying mechanism in a 'Monte Carlo shell' (a type of simulation), they discovered that the very same shock could lead to a drop as steep as -32% in other scenarios! This really changes how we should understand the impact of sudden market events.
So, why didn't we see this broader range before? Simply put, the initial 3.07x number was built on estimations and assumptions. For example, the 'net gamma' figure used in the calculations was an estimate inferred from VIX and SKEW data, not a directly observed number. More importantly, the -5% shock itself was just a 'scenario' chosen to test the mechanism, not a guaranteed future event that would occur with that exact size and speed. The real market will face bigger, smaller, faster, or slower shocks.
The takeaway? When you're dealing with estimates and scenarios, a single path is just a 'story', not a 'forecast'. The solution isn't to ditch the underlying models we have, but to treat those assumptions as 'probability distributions' instead of fixed, individual numbers. This gives us a much more realistic and useful picture of what could actually happen. And speaking of accuracy, a small data bug was also fixed, where a wrong date (Labor Day) was labeled in a previous article — all dates are now correct. But this didn't change the main conclusion. Stay tuned for more from WondTech!
This week, we got the answer, revealing that the 3.07x amplification we talked about was actually the *median* of a much wider range of potential outcomes. When experts wrapped the underlying mechanism in a 'Monte Carlo shell' (a type of simulation), they discovered that the very same shock could lead to a drop as steep as -32% in other scenarios! This really changes how we should understand the impact of sudden market events.
So, why didn't we see this broader range before? Simply put, the initial 3.07x number was built on estimations and assumptions. For example, the 'net gamma' figure used in the calculations was an estimate inferred from VIX and SKEW data, not a directly observed number. More importantly, the -5% shock itself was just a 'scenario' chosen to test the mechanism, not a guaranteed future event that would occur with that exact size and speed. The real market will face bigger, smaller, faster, or slower shocks.
The takeaway? When you're dealing with estimates and scenarios, a single path is just a 'story', not a 'forecast'. The solution isn't to ditch the underlying models we have, but to treat those assumptions as 'probability distributions' instead of fixed, individual numbers. This gives us a much more realistic and useful picture of what could actually happen. And speaking of accuracy, a small data bug was also fixed, where a wrong date (Labor Day) was labeled in a previous article — all dates are now correct. But this didn't change the main conclusion. Stay tuned for more from WondTech!
