Black Swans, Major Events & Factor Returns

How to Prepare For the Unexpected?

March 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • It is questionable if investors should prepare for catastrophic events
  • Factor returns are almost random after black swan and major events
  • Simple diversification is likely the best option for the expected and unexpected


Investors fear black swan events, although it can be argued that this fear is irrational. The black swan theory is a metaphor that describes a surprise event that has a major impact and is often rationalized with hindsight. A recent example would be the global financial crisis, which seems obvious from today’s perspective as the house price appreciation and subprime lending was unsustainable, but was almost impossible to predict beforehand.

If the event will be a surprise, should investors fear it? Markets are cyclical and bear markets are to be expected, so do not count as black swan events. How about a sudden meteor strike, the outbreak of an airborne Ebola virus, or the rise of a hostile artificial intelligence?

It is questionable if investors should or can prepare specifically for these kinds of events. Furthermore, black swan and major events tend to be unique in nature and affect companies differently. Positions in defensive sectors like healthcare or factors such as Quality often turn out differently than expected. Investors would likely consider asset-backed businesses like real estate stocks safer than consumer-discretionary companies, but that was not the case during the global financial crisis.

In this short research note, we will investigate the performance of common equity factors after black swan and major events since 1990. The objective is to simply take a walk through financial history, not necessarily to evaluate how to best prepare for the unexpected (try Finominal’s Time Machine for recreating historical track records).


We focus on seven factors namely Value, Size, Momentum, Low Volatility, Quality, Growth, and Dividend Yield. The long-only factor portfolios consist of the 30% of stocks ranked most favourably by the factor definition. Only stocks with a minimum market capitalization of $1 billion are included. Portfolios rebalance mon