This may be a old news in here, but I think this is fascinating how one quants resulting equation could become so accepted and wreak so much havoc. My own quant understanding comes from something called econophysics and I was not aware that Li's result was so widely used. Li was apparently on the path the becoming another John Nash, until the disaster hit. Anyway, sorry if this is repeat info, but it is so important it bears repeating anyway. (edited: I see it was posted earlier, sorry) http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=1
It's sorta stupid, this article... There's been a few meaningful responses to it, which people should read to see the opposing argument.
Anti-intellectual propaganda. IOW, it was the fat cats that killed Wall Street. It was a NERD. Damn NERDS
great article, thanks for posting nobel laureates almost killed the world economy with their ltcm fund in the 1990ies one of them is the co-author of the black-scholes formula, the most popular model for pricing options, used by traders. it's a pity he got dragged into the ltcm gamble . . . it's funny they tried to convince buffett to invest with them, but he didn't buy the mathematical crap . . . "the precision it projects is a chimera" he said. and it turns out he was right there are a lot of interesting mathematical concepts out there, but people tend to get carried away, that's the problem . .. no one is bigger than the market . .. robert engle did a good job with his volatility studies, he did find patterns there that are real, not imaginary . . . i'm sure he wouldn't have bought the ltcm crap
I am reading about the copula formulas here: http://en.wikipedia.org/wiki/Copula_(statistics) Can someone explain how this formula is used for the pricing of collateralized debt obligations?
The Egg-head quants confused brains with a bull market. Thats what quants do. Unwittingly fool the ignorant into buying a mirage. Blind leading the blind.
Well... You see the same ol' thing happening with non-Quant. trading systems. It was just another model that was "curve-fitted" by clueless people. Equally, our human brain does it all the time, making discretionary traders vulnerable to it too. What's interesting is how biases (cognitive, statistical, etc.) are well known but they're skewed/spun based on their perspective or idealogy, hence being a bias... Bias of the bias... (I can imagine jack hershey posting on this thread due to the topic of "bias" being introduced... which is the irony about him... and... a bunch of clueless wannabe posting things about things they have no clue about like, "Quants = Can't trade" or "Quants = Clueless about the market" )
The nature of the market demands losers entrench their bias accordingly to maintain any type viable psychology. Which is nuts. But I went through the same thing myself, trying to find and perfect an edge. Sunk Costs, false positives, one-way markets, hit-and-miss strategies all contribute to the adoption of an unshakeable bias that eventually gets shook. Courtesy of the market. A cruel master, when on the wrong side....
When a trader knows what the market is, they know what the market is not. Anything outside of stat/spread/instrument abritrage is one-in-a-million for quants. A few public guys have found and exploited "leeks" in the system. Hershey is right about that. But that dude (and there's only one I know of) pulls 60% a year. Respectable. God-like for Wallstreet. But a good scalper can take home 40%+++ a day. Impossible??