Imitation and Liquidation: Lessons From the 2007 Quant

Research output: Contribution to conferenceConference abstract for conferenceResearchpeer-review

Abstract

Between the 6th and 10th of August 2007 a large number of otherwise highly successful quantitative long/short equity hedge funds suffered great losses in what the media quickly dubbed ‘the Quant Quake’. The event (which has attracted almost no attention in economic sociology) was, assumedly, triggered by a forced liquidation of one or several large equity portfolios which impacted prices and caused funds with similar portfolios to experience losses. As a result, other funds started to deleverage their portfolio which again impacted prices, leading to a ripple effect of further losses and more deleveraging. While the 2007 quant event was not the result of a technical error, as was, for example, the case five years later when Knight Capital Group lost USD 440 million in 30 minutes due to a malfunctioning algorithm, the event revealed that the quantitative models assumedly failed to capture the increased risk exposure caused by the spurring turmoil in the subprime mortgage market and a crowding of certain types of quantitative strategies. In this paper, I examine how financial economists, the financial press and fund managers explained the quant quake and, more specifically, why the crisis was almost exclusively confined to quantitative hedge funds. Most of the examined analyses and explanations of the quant event assert that the crisis was partly caused by imitation and crowding of particular quantitative strategies. On the background of the analysis of the quant quake, I discuss the role social factors of imitation and crowding play in quantitative finance and explore whether such social factors are becoming more or less impactful in an increasingly automated world of finance.
Original languageEnglish
Publication date2017
Publication statusPublished - 2017

Keywords

  • Quant quake
  • Financial markets
  • Quantitative finance
  • Imitation
  • Crowded trades
  • Economic sociology

Cite this