What happened to the quants in August 2007? Evidence from factors and transactions data
Using the simulated returns of long/short equity portfolios based on five valuation factors, we find evidence that the "Quant Meltdown" of August 2007 began in July and continued until the end of 2007. We simulate a high-frequency marketmaking strategy, which exhibited significant losses during the week of August 6, 2007, but was profitable before and after, suggesting that the dislocation was due to market-wide deleveraging and a sudden withdrawal of marketmaking risk capital starting August 8. We identify two unwinds - one on August 1 starting at 10:45am and ending at 11:30am, and a second at the open on August 6, ending at 1:00pm - that began with stocks in the financial sector, long book-to-market, and short earnings momentum.
Year of publication: |
2011
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---|---|
Authors: | Khandani, Amir E. ; Lo, Andrew W. |
Published in: |
Journal of Financial Markets. - Elsevier, ISSN 1386-4181. - Vol. 14.2011, 1, p. 1-46
|
Publisher: |
Elsevier |
Keywords: | Systemic risk August 2007 Hedge funds Market-making Flash crash |
Saved in:
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