I don't disagree with you in terms of the trigger. Portfolio insurance dictated that you sell your positions as the prices fall - of course it's more complex than that. In 1987, the market fell 23% in one day. Of course, there had to be a trigger for people to initiate their portfolio insurance trades. The problem obviously is that people leant on the portfolio insurance as it effectively told them that they had little risk because they could simply issue the relevant sell orders as prices fell and they would be well covered. What actually happened of course is that everyone sold at the same time, prices fell and portfolio insurance dictated that they sell again and again and again. There you have excessive risk combined with a model that told everyone to sell at the same time with the obvious consequences. Similarly of late - there could have been a lot of Puerto-Rican gardeners with $14K salaries ad $1.5 Million mortgages default and the world would barely have noticed. At the heart of this crisis was the Gaussian Copula formula. Gaussian Copula was a clever bit of math which claimed to model default correlation without looking at historical data but instead used current market data from credit default swaps. So - instead of using historical data (also inherently flawed), the correlated risk of mortgage defaults was calculated based on the price of another instrument. In terms of correlated risk - I'm going to borrow from an article published by a friend : So - Gaussian Copula gave an analysis of risk that was unrealistic. Our banks used that forumla to take massive risks they didn't really understand on very illiquid products. In fact, the banks probably didn't even understand the massive risk because it was the Gaussian Copula that was used to rate the derivatives products triple A when they were junk. Sure - Pablo's mortgage default may have been the last straw BUT it was the quantitative mathematics and the consequent massive risk taking that nearly brought down the financial markets.
I haven't seen you make a contribution to the argument except that your post count is higher than mine. Is ET one of these cliquey sites where it's just members with lots of posts stroking each other ? How dissapointing...
I so agree with this! But you have to accept the fact that most new traders find it difficult to trade against the giants.
It would appear that you haven't read the posts but want to join in the debate for the hell of it. In 87, complex mathematics turned what would have been a little crash into a bloodbath. Portfolio Insurance theory is a great concept BUT not if everyone does it at the same time. If you read up on Portfolio Insurance (hell - it's in the above posts) and the avalanche of selling it caused, you would understand the role of quantitive analysis in the 23% one day drop.
I don't think so - but perhaps instead of 'joining the crowd' on this thread, you could add some meat to the bone of your argument. All I see on this thread is people taking a well formed analysis and saying 'no it isn't'. Very few quants work on algorithms to predict the direction of the markets and producing automated trading systems based on those algorithms. This is the myth of the quant. The reality of the quant is that they work on risk analysis, IT systems (e.g. HFT which is not predictive) and a host of other things not related at all to creating mechanical trading systems. Mostly they do stuff to help the real traders, although sometimes they produce eroneous risk models that almost bring the whole house down. Of course, teh interweb is full of clever quants that work for Goldman Sachs on algorithmic programs.... ... and I'm nailing Claudia Schiffer
You don't need to trade 'against' anyone. The market isn't out to get any one participant however much it may feel that way. Some institutions (e.g. ETFs) have to buy/sell stocks REGARDLESS of the profit on the trade. There's a whole host of people trading in different directions for different reasons at any one time. Stand in front of a herd of elephants and you will likely be trampled to death. Run after a herd of elephants and you may tread in the odd jumbo-turd but you will be alive and well. Not knowing there is a herd of elephants behind you is the issue.
Like everything else in the world, quantitative methods have their good and bad side and there are good quants and bad quants. If there were no quantitative methods and we go back to trading through the pits, will the crashes and panics suddenly stop? What about all the scams/ripoffs that used to happen when everything was pit-traded? If you are seeking a utopia, markets are not the place for you.