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I cannot speak on Carreyrou, but parts of _When Genius Failed_ make me think that Lowenstein did not have a good grasp of the subject he was writing about. For
by xoranth 8y ago
I cannot speak on Carreyrou, but parts of _When Genius Failed_ make me think that Lowenstein did not have a good grasp of the subject he was writing about.
For example, when discussing LTCM volatility strategies:
>The stock market, for instance, typically varies by about 15 percent to 20 percent a year. Now and then, the market might be more volatile, but it will always revert to form—or so the mathematicians in Greenwich believed. It was guided by the unseen law of large numbers, which assured the world of a normal distribution of brown cows and spotted cows and quiet trading days and market crashes. For Long-Term’s professors, with their supreme faith in markets, this was written in stone. It flowed from their Mertonian view of markets as efficient machines that spit out new prices with all the random logic of heat molecules dispersing through a cloud.
From this quote it looks like Lowenstein believed that
1. Volatility is not mean reverting
2. The reason people at LTCM believed volatility was mean reverting was due to complex mathematical models rooted in market efficiency.
Now, volatility mean reversion is something that can be easily seen by looking at a graph of volatility over time [1].
Also, Lowenstein does not do a good job at describing the way LTCM modeled risk, and the way it failed. In fact, he barely even tries. He just hints here and there about "correlations going to one", but nothing more.
For example, which assumptions failed? Did they assume that different kind of bets (relative value between bonds, merger arbitrage, arbitrage between double-listed equities, etc) were uncorrelated?
Did they get hurt more by different kind of bets being correlated, or by some bets going particularly wrong? Did they stress test their risk measures in any way?
[1] E.g. https://a.c-dn.net/b/4tKv1V/Forex-Trading-Video-SPX-and-VIX-Led-Risk-Reach-Defining-the-Quarter-Dollars-Hesitates-in-Bull-Turn-_body_VIX_Lifetime_10.png.full.png https://a.c-dn.net/b/4tKv1V/Forex-Trading-Video-SPX-and-VIX-...