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Market defeated mathematicians |
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Last century marked the rapid development of the theory of investment based on quantitative methods. The starting point was the idea of Harry Markovitza (later improved, inter alia, by Sharpe), who proposed the so-called efficient portfolio and introduced the idea of diversification.
Another breakthrough came in the use of large scale high-performance computers. The most tedious and complicated calculations through modern software has been automated and shortened, and the capital markets have mastered the powerful investment banks largely based on their individual models, which is guarded like military secrets. Many funds and banks hired math geniuses who are using various methods of trying to capture market imperfections through arbitration or the odds of a high probability of the emergence of a specific event (decrease or increase in prices), based on repetitive patterns. In a sense we can speak here of the similarity of the technical analysis, which assumes that based on the history of certain formations or indicators suggest that a higher return than the conclusion of the transaction entirely accidental. But while the technical analysis rating chart is often debatable and subjective, here "quants" are ready to score if, for example, the average or oscillator actually gives us an advantage over the market. Of course, it comes with a much more complex operations, but the same principle lies in the fact that nobody is based on their opinions, but all actions are based on mathematical calculations and back-testing ". Quants turned out to be a huge hit in recent years, although it seems that on the occasion of some forgotten catastrophe fund LCTM more than a decade before, when the well was based on complex mathematical formulas, and everything worked great until it came to the event, which in theory did not happen right , the proverbial black swan. A similar story describes in his latest book, bearing the title "The Quants" Scott Patterson - on a daily newspaper reporter for The Wall Street Journal. Author focuses on the recent events of 2007, when tąpnął U.S. real estate market, followed by the exchange. Not all are aware of the scale of the phenomenon, but in fact a huge percentage of transactions on stock exchanges around the world-including possibly also the biggest companies in Warsaw, are made based on indications of the software prepared by the quants. In this way the joke: "Computers are playing alone together" sometimes does not deviate far from the truth. Under normal conditions, various strategies developed by quants deliver excellent results. Meanwhile, the 2007 models were not worth much, because there is an event that is not taken into account the projections in its mathematicians and programmers-collapse of U.S. real estate market. Operating systems, yet perfectly resulted in billions in losses, and the risk of once again reminded about yourself. Quants beat the market. But not so to the end, because soon with the help of hastened the American authorities have spared no billions of dollars extracted from the pockets of Americans .. Thanks to the big banks again revived, and after a slight tuning software quants again earn them big money Probably until the next disaster will come when the next black swan and lands on Wall Street.
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