• modeling of abnormal distributions was a problem largely unsolved in mathematics., pp.104-105, Sebastian Mallaby., More money than god : hedge funds and the making of a new elite, 2010.
• normal distribution, Gaussian curve, bell-shaped curve
• For non-nerds, this distribution is often called the bell-curve. For nerds, it is the normal distribution. For nerds who like to show-off, the distribution is Gaussian., Tails of the unexpected Paper by Andrew G Haldane (and) Benjamin Nelson, “The Credit Crisis Five Years On: Unpacking the Crisis”, conference held at the University of Edinburg Business School, 8-9 June 2012
• Even in the early 1960s, a maverick mathematician named Benoit Mandelbrot argued that the tails of the distribution might be fatter than the normal bell curve assumed; and Eugene Fama, the father of efficient-market theory, who got to know Mandelbrot at the time, conducted tests on stock-price changes that confirmed Mandelbrot's assertion., pp.104-105, Sebastian Mallaby., More money than god : hedge funds and the making of a new elite, 2010.
• The trouble with [Benoit] Mandelbrot's insight was that it was too awkward to live with; it rendered the statistical tools of financial economics useless, since the modeling of abnormal distributions was a problem largely unsolved in mathematics., pp.104-105, Sebastian Mallaby., More money than god : hedge funds and the making of a new elite, 2010.
• the ... hypothesis did not apply to moments of crisis., p.106, Sebastian Mallaby., More money than god : hedge funds and the making of a new elite, 2010.
• [models] do not work in crisis; rather, the models stop working.
- Self-organized criticality [SOC] might provide a possible perspective and thinking tool kit in moments of crisis
- ...
- Per Bak, How nature works, 1996 (book)
- see 1987 Per Bak, Chao Tang, and Kurt Weisenfeld
Sebastian Mallaby., More money than god : hedge funds and the making of a new elite, 2010.
• modeling of abnormal distributions was a problem largely unsolved in mathematics.
• Even in the early 1960s, a maverick mathematician named Benoit Mandelbrot argued that the tails of the distribution might be fatter than the normal bell curve assumed; and Eugene Fama, the father of efficient-market theory, who got to know Mandelbrot at the time, conducted tests on stock-price changes that confirmed Mandelbrot's assertion.
• The trouble with [Benoit] Mandelbrot's insight was that it was too awkward to live with; it rendered the statistical tools of financial economics useless, since the modeling of abnormal distributions was a problem largely unsolved in mathematics.
• the ... hypothesis did not apply to moments of crisis.
pp.104-105
The efficient-market hypothesis had always been based on a precarious assumption: the price changes conformed to a “normal” probability distribution ── the one represented by the familiar bell curve, in which numbers at and near the median crop up frequently while numbers in the tails distribution are rare to the point of vanishing. Even in the early 1960s, a maverick mathematician named Benoit Mandelbrot argued that the tails of the distribution might be fatter than the normal bell curve assumed; and Eugene Fama, the father of efficient-market theory, who got to know Mandelbrot at the time, conducted tests on stock-price changes that confirmed Mandelbrot's assertion. If price changes had been normally distributed, jumps greater than five standard deviations should have shown up in daily price data about once every 7,000 years. Instead, they cropped up about once every three to four years.
Having made this discovery, Fama and his colleagues buried it. The trouble with Mandelbrot's insight was that it was too awkward to live with; it rendered the statistical tools of financial economics useless, since the modeling of abnormal distributions was a problem largely unsolved in mathematics.
p.105
Paul Cootner, complained that “Mandelbrot, like Prime Minister Churchill before him, promises us not utopia but blood, sweat, toil and tears. If he is right, almost all of our statistical tools are obsolete ── least squares, spectral analysis, workable maximum-likelihood solutions, all our established sample theory, closed distribution functions. Almost without exception, past econometric work is meaningless.”66
p.105
To prevent itself from toppling into this intellectual abyss, the economics profession kept its eyes trained the other way, especially since the mathematics of normal distributions was generating stunning breakthroughs.
p.105
In 1973 a trio of economists produced a revolutionary method for valuing options, and a thrilling new financial industry was born. Mandelbrot's objections were brushed off.
p.105
The crash of 1987 forced the economics profession to reexamine that assertion.
p.105
To put that probability into perspective, it meant that an event such as the crash would not be anticipated to occur even if the stock market were to remain open for twenty billion years, the upper end of the expected duration of the universe,
p.106
As well as challenging the statistical foundation of financial economists' thinking, Black Monday forced a reconsideration of their institutional assumptions.
p.106
In the chaos of the market meltdown, brokers' phone lines were jammed with calls from panicking sellers; it was hard to get through and place an order.
p.106
And, most important, the sheer weight of selling made it too risky to go against the trend. When the whole world is selling, it doesn't matter whether sophisticated hedge funds believe that prices have fallen too far. Buying is crazy.
At a minimum, it seemed, the efficient-market hypothesis did not apply to moments of crisis.
pp.106-107
But the crash raised a further question too: If markets were efficient, why had the equity bubble inflated in the first place? Again, the answer seemed to lie partly in the institutional obstacles faced by speculators. In the summer of 1987, investors could see plainly that stocks were selling for higher multiples of corporate earnings than they had historically; but if the market was determined to value them that way, it would cost money to buck it.
p.293
The early options models, created among others by the two LTCM Nobel laureates, RObert Merton and Myron Scholes, assumed that stock-price changes were distributed normally. The 1987 crash had demonstrated that this assumption was not merely shaky; it was dangerously wrong ── the truth was that extreme price moves happen far more frequently than the normal distribution anticipated.
(More money than god : hedge funds and the making of a new elite / Sebastian Mallaby., 1. hedge funds., 2. investment advisors., HG4530.M249 2010, 332.64'524──dc22, 2010, )
____________________________________
Sebastian Mallaby., More money than god : hedge funds and the making of a new elite, 2010.
p.101
The larger the funds grew, the harder it became to jump in and out of the markets without disrupting prices and damaging themselves in the process.
pp.66-67
Shortly after Commodities Corporation got under way, U.S. corn fields were hit by a fungal disease known as the corn blight. Some plant experts predicted that the blight would reappear the following year, and on a bigger scale; corn futures started to moved up in expectation of impending scarcity.
p.67
Faced with a thicket of semiscientific rumor that was scaring the market, Weymar and his colleagues saw a chance to get an edge.
p.67
They retained a plant pathologist at Rutgers university who advised the state of New Jersey, increasing his research budget and covering his expenses as he journeyed around the country attending scientific conferences.
p.67
After some weeks of investigation, the Rutgers pathologist concluded that the blight fright was overdone: The plethora of scare stories reflected nothing more infectious than the alarmist bias of the media.
p.67
Weymar and his colleagues jumped. The pathologist's conclusion meant that corn prices would be coming down, so the traders started to pile in, building vast short positions in anticipation of the time when the alarmism would prove to be unfounded.
p.67
The one Friday night, alongside its regular coverage of Vietnam, CBS news ran a special report on the corn blight. It featured the Illinois state plant pathologist, a man representing a state with a lot more corn than New Jersey. And the man from the corn state was predicting a catastrophic corn harvest.
p.67
They had built a vast short position in the corn market, betting their firm on the advice of a pathologist who was now being contradicted by a senior colleague.
p.67
When the markets finally opened on Monday, corn futures jumped so steeply that trading was immediately suspended: Commodity exchanges place a limit on allowable daily movements to dampen extreme swings in prices. There was no chance whatever to get out of the market; prices hit their limit after a smattering of contracts had changed hands, and Weymar and his friends were trapped in their positions.
p.67
It wasn't until Tuesday that the Commodities Corporation traders managed to dump their short positions, and by then the damage had been done:
p.67
It was not much consolation that the pathologist from Rutgers eventually turned out to be right. There was no corn blight, and Commodities Corporation had closed out its short positions at the absolute top of the market.
pp.67-68
The corn debacle of 1971 brought Commodities Corporation to within a hairbreadth of closure.
pp.68-69
p.68
After the 1971 debacle, Weymar set about rethinking his theory of the market. He had begun with an economist's faith in model building and data: Prices reflected the fundamental forces of supply and demand, so if you could anticipate those things you were on your way to riches. But experience had taught him some humility. An exaggerated faith in data could turn out to be a curse, breeding the sort of hubris that leads you into trading positions too big to be sustainable.
p.69
If Commodities Corporation had bet against the corn blight on a more modest scale, it might not have been scared out of its positions by an item on the evening news. The result would have been a profit rather than a near-death experience.
Weymar's rethink began with a new approach to risk taking.
p.69
p.69 risk-control system
p.70
The new risk-control system was connected to another rethink that followed the corn debacle: Weymar and his colleagues developed fresh respect for trends in prices.
efficient-market theory holds that such trend did not exist:
random-walk consensus was so dominant that, through the 1970s and such of the 1980s, it was hard to get alternative views published in academic journals.
p.70
a get alternative views
p.70
historical commodity price data
gathered and formatted by Dunn & Hargitt.
a firm in Indiana
But Frank Vannerson had gotten his hands on a trove of historical commodity price data that had been gathered and formatted by Dunn & Hargitt, a firm in Indiana.
p.70
that price trends really did exist,
p.70
devised a computer program that could trade on that finding.
p.70
Weymar was initially skeptical of Vannerson's project.27 His trend-following concept seemed disarmingly simple: Buy things that have just gone up on the theory that they will continue to go up; short things that have just gone down on the theory that they will continue to go down. Even though Vannerson's program took a step beyond that ── it tried to distinguish upticks that might signify a lasting trend from upticks that signified nothing ── Weymar stll doubted that anyone could make serious money from something so trivial. But by the summer of 1971, Weymar had reversed himself.
p.71
Weymar's cocoa model, which had worked so well at Nabisco, had misjudged the direction of the market expensively during Commodities Corporation's first year.
But Vannerson's trend-following model, which watched patterns in the market rather than the fundamentals of chocolate consumption or rainfall, had made money consistently from the day the firm opened.
p.71
prohibited traders from committing more than a 10th of their capital in betting against a trend, and the trends used in implementing the controls were the ones identified by Vannerson's program.
p.71
even though trend following had little standing within academia and none within his own research.
(More money than god : hedge funds and the making of a new elite / Sebastian Mallaby., 1. hedge funds., 2. investment advisors., HG4530.M249 2010, 332.64'524──dc22, 2010, )
____________________________________
No comments:
Post a Comment