LTCM biggest problem was they moved away from the core models that where reliable because they had saturated these core markets. In addition they overtraded and forgot that the risk of the 5 sigma event is much greater than a normal distribution would imply. In some ways it the same type of thing that happens to many traders who blow up, over confidence and then over trading.
They returned half their investors money at one point but allowed the same margin amount, effectively doubling their leverage before the 5 sigma event. Talk about over confident.
Murray, And wasn't it also the case that LTCM's model didn't factor in a government (Russia) defaulting on its bonds? I think it was their VAR model - which may be what your referring to. Grant.
That's really very funny. On a basis of fundamental mathematics, I wonder if you even realize how absurd that comment is. I'm not intending to be inflammatory here. It just baffles me when people make statements like this. Or that ai is not applicable to the markets when they obviously don't even know what ai is... what various types of ai there are. Or even if they did, they would not have a clue as to how-and-what data decision environments they could properly accommodate. So consider... before commenting on a subject, be relatively sure you know what it is your commenting on. jmho -kt
Yes , It was David DeRosa dubbed VAR models as "a lighthouse for the soon to be shipwrecked" In terms of the Russia issues , The spread between Treasuries and corporate bonds widen which was the opposite of what LTCM was betting on. The Russian issues were not in the model, because once you add these types of events to a model it become too hard to model , that is why VAR models have big problems.
Technical analysis is no science... Why, because the markets rely on the interaction of people, and since sociology is about as much a science as astrology, it is no science. But there are reoccuring generalities, however.
A science is falsifiable... Can you predict human behaviour as accurately as the force of gravity on a falling object? ''No," I hear you say? Why not? Because it 'aint science!
Just a question to ponder Then you would say that meteorology is also not a science because the weather can not be predicted like gravity ?.