What happened to the quants in August 2007? Evidence from factors and transactions data
Author(s)
Khandani, Amir Ehsan; Lo, Andrew W
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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.
Date issued
2010-08Department
Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science; Sloan School of Management; Sloan School of Management. Laboratory for Financial EngineeringJournal
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
ISSN
1386-4181