http://www.reuters.com/article/newsOne/idUSTRE4BL02N20081222?pageNumber=1&virtualBrandChannel=0 By Phil Wahba NEW YORK (Reuters) - Last week, New York University and Carnegie Mellon sent a new class of math whizzes out into a profession that is both blamed for the financial collapse and charged with preventing it happening again. Many of these so-called quantitative analysts, or "quants," graduating from elite financial engineering courses will end up writing computer programs that handle an ever greater share of market trading. Because some of their mathematical models failed to take into account factors that later turned out to be crucial, quants have been blamed for compounding risk and exacerbating the crash in financial markets. But far from going into decline, those with financial engineering degrees are still in demand as hedge funds and banks seek ways to measure previously unforeseen risks and factor them into their models. The profession's reputation took a beating in August 2007, when some quant funds -- which try to beat the market by crunching vast amounts of data at lightning speed -- lost a third of their value in a matter of days. Many blamed the math commandos for failing to factor in extreme events, in this case unprecedented numbers of home mortgage foreclosures. Critics and practitioners alike agree they need to improve their modeling, and that begins at the elite financial engineering programs, which have come to be known as "quant farms." Both New York University and Carnegie Mellon University in Pittsburgh, which between them minted about 100 new quants this month, have tweaked their curricula, lest their graduates miss another brewing disaster. Meanwhile, at Columbia University, the masters of financial engineering program has tried to give its students a wider view of the market outside mathematical models, said program director Emanuel Derman. "You have to understand you are dealing with people and markets, and they don't respond the way physical systems do," said Derman, a former managing director at Goldman Sachs. PLUS CA CHANGE As the mortgage crisis gathered steam last year and financial markets became volatile, quant funds, which make up about 7 percent of the hedge fund universe, were caught flat-footed. To raise cash, they started selling stocks, which created unusual moves in stock prices, throwing other quant models off. Finally, the selling snowballed into a full market panic. "Before you know it, you have a chain reaction and the whole market dives on the basis of what amounts to a mathematical prediction," said Peter Morici an economics professor at the University of Maryland. "You create a mathematical herd. That's why so often these schemes based on math models end in tears." Continued...
A number of the quant models worked off the assumption that the price of housing never went down. On that note I think it should become a standard requirement that any person who is majoring in quantitative finance to take a class in common sense 101.
Well... the article is kinda naive... Doesn't reflect what "a lot of people" are thinking. What all the new kids will be doing is developing models with added dataset of this crash. Quants basically suck at exposing undetermined risk. All they will do is determine the new set of risks that just happened, hoping that it's enough to survive through the next one.
i think the problem is that while these quants can build models to tell you what the price is today, but they can't build a model to tell you what the price will be tomorrow.
No one can. The basic premises of any model or trade is "If the current condition sustains... ... the prices can move up to xxxxx. ... the trend will continue. ... the market will reverse. ... the system will make $xxxx. ... the system will return $xxxx. etc. etc. The difference is how you define "condition" and the conditions change. It can be trend... it can be tendency... it can economical condition... it can patterns... it can be players.... order flow.... it can be anything about the market. It's the "market" part of "Markets always change"
"You have to understand you are dealing with people and markets, and they don't respond the way physical systems do," ....so true....Happy X-Mas
LOL, watch them pay option premiums out the asshole betting on 2008 events happening again... but instead it will be like 2003... 2004... 2005... then when they get sick of paying the premiums (or their investors do), maybe 3 or maybe 15 years down the line... BOOM 2008 does come again... lol.... just gotta trade it...
Most of these models are pricing models, not predictive models. Forecasting is not in the job description of most quants