Technology and automation are transforming markets and will create endogenous volatility and new anomalies.
This is an excerpt from Algos and Egos, a book in draft by Robert Hillman. This section describes how during 2002/2003, people at the Bank of England where I worked at the time, began getting concerned about the risks being created by the innovations in long-dated derivatives, designed to attract Asian retail investors trying to find yield in a low-yield environment. ...
Slides given by Robert Hillman to the OECD NAEC Innovation Lab, 28th November 2019. The slides describe Robert's view of the evolution of agent based modelling in the last 30 years, and describes a couple of new use cases related to long horizon simulation and short-term volatility forecasting and stress testing. ...
During the last few years it feels to us that there has been a pick-up in commentary that markets have become harder to extract profits from. Blame has been pointed towards the rise of algorithms. ...
Through the lens of new quantitative methodologies and critiquing recent published research, this discussion explores the implications of the shift from active to passive investing. We see in simulations that market dynamics can suddenly and dramatically change with little warning. ...
In this slightly modified version of our Monthly Research Notes, Robert provides some personal reflections on the recurrent question of whether trend-following is broken. He also discusses a related issue - the shift from active to passive management. ...
As monetary policy accommodation is being withdrawn some policy makers have drawn attention to the potential for bond yields to 'snapback'. In this paper we present a methodology we use to assess amplification risk in markets. It is an updated version of a paper we provided to a limited number of recipients last year. ...
In December 2017, almost at the low in terms of recent volatility, the London Quant Group debated the motion "This house believes that low volatility, low trading volumes and positive returns across assets are 'the new normal' and are here to stay...". ...
Just as pension funds have begun allocating to trend-following as a hopeful source of tail protection, regulators are beginning to voice concerns over whether trend-following and other algorithmic risk-management strategies can amplify market downturns. Might a pension funds attempts to mitigate their risks be self-defeating? ...
In this note I present some parallels between financial and weather forecasting underpinned by pressing challenges both disciplines are facing and argue that embracing computer simulation is the way forward. ...
There is a rise in the use of trend following to provide portfolio tail protection. Marketing exploits the empirical observation that trend following has tended to be profitable during times of crisis. But this so-called crisis alpha is controversial. Some established managers embrace the concept, others eschew it. This paper explores what lies beneath the caution. ...
The success of DeepMind's AlphaGo and the power of AI as an analytical tool have raised the possibility of achieving better results by outsourcing risk management to non-human algorithms. In this note we evaluate the comparative strengths and weaknesses of human and machine intelligence in the investment process. ...
This is part of a series of notes on a rapidly developing theme in financial markets and investing namely the collision of algos and egos. In this note I write a fictional review of how a future observer may look back on 2017. ...
In this note I explain how financial markets are quickly resembling a giant computer simulation and as such we should shift our approach to studying them accordingly. The tools necessary were developed in the 1990s but are only now becoming operational. The shift to this new approach could happen very fast. ...
This is the first in a series of notes on a rapidly developing theme in financial markets and investing, namely the collision of algos and egos. I will cover issues like the revival of portfolio insurance, the replacement of star-traders by automated trading strategies, the disillusionment of institutional investors with active managers, and the hopes pinned on machine learning and technology. ...
I started studying economics in September 1987. One month later the US stock market dropped 22% in a day. 28 years later and I'm still studying economics, and stock markets are still crashing. Reflecting on the circumstances around 1987 offers insights into today's markets and the recent performance of managed futures. The key point of ...
In the early 1990s excitement grew around the potential application of machine learning and artificial intelligence techniques to finance. Take this introduction to a book in 1993: "Two crucial developments occurred around 1980; both were enabled by the general availability of powerful computers that permitted much longer time series to be recorded, more complex algorithms..." ...
Technical analysts have been much derided over the years, particularly by the mainstream economics and finance professions. Perhaps the most fun account of chartists is still provided by Ed Malkiel's classic 'A Random Walk Down Wall Street'. "On close examination, technicians are often seen with holes in their shoes and frayed shirt collars. I, personally, have..." ...