Market Crisis: Did Quantitative Strategies Compound the Problem?
Posted June 12, 2008
In the autumn of 2008, triggered by a catastrophic failure of the U.S. subprime mortgage market, the world's stock exchanges erased hundreds of billions of dollars in a matter of days, and government and industry efforts to mitigate the damage have had only limited success. At an April 17, 2008, meeting of the Academy's Quantitative Finance Discussion Group, four quantitative finance specialists analyzed the situation. Investors' faith in quantitative modeling may have helped cause the market crisis now underway, they concluded. And many of the investment models were built on the flawed assumption that nationwide home prices could only go up.
Other conclusions presented were that an unforeseen liquidity crisis in quantitative hedge funds in August 2007 was likely triggered by the broader subprime/credit crisis and that while most investment models assume a Gaussian distribution of risk, markets appear to behave according to a power law instead.
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Emanuel Derman, PhD
After earning a PhD in theoretical physics at Columbia University, Emanuel Derman pursued a career in academia and spent a few years at AT&T Bell Labs. He then moved to Wall Street, where he rose to become managing director of Goldman Sachs in 1997. He has now returned to academic life as the director of the program in financial engineering at Columbia. He was named Sun Guard IFE Financial Engineer of the Year in 2000, and won a Wilmott Award in 2006.
The author of several books on finance and history, former Navy Gunner's Mate James Grant is also a frequent interviewee in financial television news coverage. He holds a Master's degree in international relations from Columbia University, and is the editor of the widely read financial newsletter Grant's Interest Rate Observer, which he founded in 1983.
Brian Hayes, PhD
After earning a BS in physics from Caltech and a PhD in mathematics from NYU, Brian Hayes held several academic positions, then moved into the field of hyperbolic investments. An author on numerous academic papers and a well-known analyst on Wall Street, he is currently a manager at Lehman Brothers.
Kenneth Posner, MBA
Former US Army Captain Kenneth Posner is qualified as a certified public accountant as well as an airborne ranger. He holds a BA from Yale and an MBA from the University of Chicago Graduate School of Business. Before moving to his position as the head of mortgage finance research at Morgan Stanley, he was in investment banking for commercial real estate.
Alan Dove is a science writer and reporter for Nature Medicine, Nature Biotechnology, and Bioscience Technology. He also teaches at the NYU School of Journalism, and blogs at http://dovdox.com.