The Black Swan And Japanese Market Crash Of 3/11/11

The Black Swan And Japanese Market Crash Of 3/11/11
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Below is an excerpt from Fabrizio Lavezzari’s recent work, The Volatility Smirk. ( , a fiction set in Tokyo and inspired by true events related to the Great East Japan Earthquake.

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The Volatility Smirk – Plot

The main character, Ken Rochat is a hardened Japanese – European former banker who is struggling to pitch his budding investment management business to investors, whilst haunted by the specter of the loss of a close friend and an overzealous government officer. As he puts on risky positions on derivative contracts on the Nikkei 225 Index, a powerful earthquake jolts Tokyo. He will get caught in a series of tumultuous, seemingly random events ultimately exposing a multi-layered conspiracy involving a billionaire hedge fund tycoon, a femme fatale of many resources and a mysterious ship moored in the middle of Tokyo Bay.

In the wake of the Great East Japan Earthquake of March 11, 2011, the Japanese stock market plunged by twenty percent over two days, in the least talked about flash-crash in history, triggering margin calls and putting several brokers and investors out of business. What if anything was not as it seemed? “The Volatility Smirk” is a financial thriller inspired by those events and presents a unique conspiracy theory angle whilst encompassing a wide variety of topics from black swans to Mahayana Buddhism.

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The Great East Japan Earthquake

The Great East Japan Earthquake struck Japan on Friday, March 11, 2011 at 2:46 p.m. It had a 9.1 magnitude with an epicenter 231 miles northeast of Tokyo, causing a thirty-foot-tall tsunami and more than 22,000 casualties. The tsunami hit the coast and other than sweeping cars and buildings, it inflicted major damage on two nuclear power plants in Fukushima. The following morning, a nuclear emergency was declared among reports that the earthquake and tsunami had cut off the reactors’ electrical power and that backup generators were disabled.

The Japanese Nuclear and Industrial Safety Agency soon announced that the radiation level nearby was more than eight times the norm and most of the cooling systems were disabled. At least six million homes or 10% of Japan’s households were left without electricity and a million without water. On March 13, 185,000 people living within 20 kilometers of the affected power plants were evacuated and 50,000 Japan Self-Defense Forces personnel were deployed. The government reported that a partial meltdown of the reactor’s core in one of the two plants may be occurring.

In Tokyo, the quake registered an intensity of slightly less than five degrees on the Japanese Shindo scale and the casualty toll was seven dead and 117 injured. Nearly 6,500 houses were totally or partially damaged. Telecommunications, power and transportation were affected with disruptions to the cell phone and railway networks causing a massive exodus of people trying to reach their homes on foot. More than four million households were affected by the above power outages and the railway network began to be gradually restored only after 8:30 p.m. on that day.

Impact of the quake

In landfilled areas (places built on land reclaimed from the sea), when the earthquake struck the soil melted, a phenomenon known as liquefaction, which caused the pavement to crack and black liquid to flow outside.

From the above, one can infer the breadth of such unprecedented and extraordinary circumstances. An area nearby the quake’s epicenter was at risk of a nuclear holocaust with the entire Tokyo region being disrupted. Whilst it is inevitable to focus on the human tragedy, it is interesting to note how the financial regulators and market participants reacted to this extraordinary event.

Later in the day, on March 11, the Financial Services Authority and the Bank of Japan issued a series of guidelines to banks, brokers and insurance companies mostly dealing with procedures in case of loss of paper documents such as bank books, securities certificates and insurance policies. As far as the Tokyo Stock Exchange was concerned, the business continuity plan was immediately triggered. Aside from disruption to the elevator service within the premises, it was ascertained that no damage had been caused to the trading system.

Because all means of transportation had come to a halt, employees were allowed to leave in an orderly fashion to reach their homes on foot from 4:30 p.m.  During the weekend, talks were held with market participants and prior to the beginning of trading at 9:00 a.m. Monday, March 14 a decision was taken that it was to be business as usual; the market opened without any particular additional measures like stop-losses or short-selling restrictions being adopted despite the emergency.

Financial Implications of the Great East Japan Earthquake

On March 14, the Nikkei 225 Index fell by nearly 7%. The following day, the closing price plunged by another 12%. The decline was the third largest since World War II, second only to those of Black Monday in 1987 and the Global Financial Crisis in 2008. The graph on the front cover of The Volatility Smirk depicts the dramatic plunge. The two-day decline, exacerbated by Mizuho Bank’s system failure and prolonged disruptions to the railway network, led to a slew of margin calls and eventually caused several brokers and individuals to file for bankruptcy or to shut down entire business lines.

I happened to be in my house the day the quake struck, on the thirty-first floor of a high-rise building. Despite being far away from the epicenter, the building lurched to such an extent that for an instant that seemed to last forever, I thought that it would be my last day. It also happened that this occurred at what the protagonist of Fight Club would call a very strange time in my life. Furthermore, I had come across Taleb’s Black Swan only earlier on that year and I would never have imagined bearing witness to one that soon; but, then again, that is why they are called black swans.

A Black Swan

The Volatility Smirk is set at an unspecified point in time after March 11, 2011 and draws inspiration from the above and other events that occurred in the Japanese financial markets in the past thirty years; the chronology of some of those or the texture of the economic and business environment may have slightly been changed for narrative purposes in some sections of the book.

Other than the Great East Japan Earthquake of 2011, the book nods to several true events that occurred in the Japanese financial markets in the past thirty years including the debacle of Yamaichi Securities and many others, taking the reader through the mores of Japan’s corporate and bureaucracy worlds, with fleeting glimpses of its night-time, dark underworld.

Great East Japan Earthquake:  The Smile of Volatility

In the fall of 2011, I had started to write a book of short essays I had named The Smile of Volatility, which soon took a backseat as I was preoccupied with more mundane matters at that time; I had already left my philosophical musings together with the Mishima and Heidegger readings long ago, on the dusted shelves of the house I lived in during my youth.  Regardless, after witnessing the black swan of March 2011, I have kept an avid interest in option trading, and from earlier this year I found myself with some spare time to experiment with back-testing of strategies.

In the process, I came to reminisce of those days, and like the characters of the book, started to look for a common thread. As I progressed with the writing, something that I had not felt for a while happened, in the shape of a series of what Jung would call synchronicity events; as for myself, by nature I tend to believe that everything happens for a reason.

I am a big fan of stories with parallel plots which at some time would cross with each other. Or stories that begin with the climax, rewind back to the exposition and resume at the denouement. As such, some of my favorite movies are Magnolia, Crash, Babel and Memento. I referred to movies on purpose; I tried to be as descriptive and visual as possible to convey to the readers the impression that they are watching a movie, and I do not conceal the fact that I would love to see this story adapted into a script for a flick.


The book is a noir and the characters are often glumly depicted; it is also a thriller. The story swings back and forth from a poignant atmosphere with hints at Mishima’s Sea of Fertility tetralogy to the up-tempo pace of a Hollywood-style thriller not without some humorous moments and nods to some of the classics from the ’80s such as Black Rain and Wall Street.

If you have the time, do check the website and in case you are planning to board an international flight and you need something to read after you have gone through the duty-free magazine twice, you may want to consider the book.

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Jacob Wolinsky is the founder of, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at) - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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