What happened to the quants in August 2007? Evidence from factors and transactions data
Name
What Happened to the Quants w Evidence.pdf
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711.44 KB
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Adobe PDF
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e707fc6b055ec9493a5726f2260e67c3
Author(s)
Khandani, Amir Ehsan
Lo, Andrew W
Date Issued
August 2010
Journal
Journal of Financial Markets
Publisher
Elsevier
Citation
Khandani, Amir E. and Lo, Andrew W. “What Happened to the Quants in August 2007? Evidence from Factors and Transactions Data.” Journal of Financial Markets 14, no. 1 (February 2011): 1–46. © 2010 Elsevier B.V.
Version
Author's final manuscript
Abstract
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.
MIT Department
Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science
Sloan School of Management
Sloan School of Management. Laboratory for Financial Engineering
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
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DOI of Published Version
https://doi.org/10.1016/j.finmar.2010.07.005
