Black Swan Investing: An empirical study in context of efficient markets

Abstract: Purpose: The purpose of this paper is to assess the sustainability of the efficient market theorem when accounting for extreme events, which are of the essence in a Black Swan investment philosophy. Methodology: Quantitative approach. Empirical foundation: Historical secondary monthly and daily data of various variables during January 1, 1996 - December 31, 2012. Conclusions: The Black Swan investment strategy applied in this paper does not generate risk adjusted returns or pure returns that significantly differ from market equilibrium returns. The empirical results hence supports the efficient market theorem but puts a question mark on market efficiency when it comes to pricing deep out of the money put options. Limitations: The methodological approach resulted in a number of shortcomings that had implication for the overall empirical result. The validity of the results presented should be taken with some caution since the timeframe of the study was rather limited due to option data availability. Furthermore, the time restriction and operationalization process required some significant assumptions and delimitations in order to ensure hindsight research bias and data processability.