Tuesday, August 19, 2008

They live and they die by the square root of pi

Now Greenspan doesn't like bailouts?

Greenspan is utterly clueless and unable to learn from his mistakes. Delusions of infallibility bring me to another subject: quantitative trading. Quantitative analysts have pursued a strategy based on the notion that the money to be made in stocks comes via mathematics rather than from company fundamentals. I believe that this strategy is responsible for much of the pandemonium we see on a regular basis. No market seems to be safe from these maniacal, algorithm-wielding computer beasts. In a way, their systems have made it possible (in the short run) for almost anything to trade at any price, whether foreign exchange, stocks or commodities in general.

Posted by malct @ 08:35 AM (630 views)
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6 thoughts on “They live and they die by the square root of pi

  • “Quantitative analysts have pursued a strategy based on the notion that the money to be made in stocks comes via mathematics rather than from company fundamentals. I believe that this strategy is responsible for much of the pandemonium we see on a regular basis.£

    Are you sure?

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  • Beware of prophets bearing graphs and ‘cycles’?

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  • Quantitative analysis doesn’t improve “alpha”. Unlike someone like Buffet who improves management etc. quants, amongst other things such as creating new products, look for “inefficiencies” in the market etc. This is reasonable, and probably promotes stability when these strategies form a small part of the financial world. Derivatives, for instance, serve a role as insurance and hence lubrication for financial markets when they form a small part of the market. However, once these sorts of strategies start becoming large portions of the market, or even swamping the underlying (e.g. the size of derivative contracts relative to the amount of underlying that actually exists) then they must almost surely start to destabilise through feedback etc. the market as a whole. A little bit of liquidity is a good thing, a lot of liquidity may not be.

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  • Generally, a Quant shows how a trading a portfolio of securities can match another portfolio of securities.

    Quants just provide the models. I think you are concerned about the traders who use the models. The danger is when a model gives a strategy with an expected of a few basis points, but the trader leverages up this return, with out realising that the risk is not always a linear function of return (e.g. a large position in a small market).

    “their systems have made it possible (in the short run) for almost anything to trade at any price, whether foreign exchange, stocks or commodities in general” Sounds like a good functioning market to me. Not sure about the ‘any price’ bit tho.

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  • mark wadsworth says:

    1.77245385090552?

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