The Quant Delusion: Financial Engineering in the post-Lehman Landscape
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Date: 04-27-2009
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Stephen Blyth, Harvard Management Co.
Location: 412 Schapiro CEPSR, Davis Auditorium
ABSTRACT
There has been much discussion recently amongst financial engineers (“quants”) about the limitations of quantitative models for pricing derivative securities. As Emanuel Derman has written, “The most important questions about any model are: ‘What does it ignore and how wrong is it likely to be?” The financial markets have shown an uncanny ability to provide the answers to these two questions, especially to quants who did not ask them in the first place.
Recent dislocations in the financial markets, especially since the bankruptcy of Lehman Brothers in September 2008, are significantly changing the landscape for financial engineering and are challenging fundamental assumptions behind the application of quantitative models. Generally accepted logical arguments for assessing value have been shown to have limited validity. We present an empirical review of recent market phenomena that illustrate this shifting landscape, focusing on events in fixed-income markets. We describe some possible causes for these phenomena, in particular highlighting constraints that currently affect a broad range of market participants. We discuss whether such a landscape is likely to persist into the future and how quants and investors can adapt to the new environment.
BIO
Dr. Stephen Blyth is Managing Director and Head of Internal Portfolio Management at the Harvard Management Company, the wholly-owned subsidiary of Harvard University which is responsible for the management of the University’s endowment and related accounts. He is also a member of the faculty of the Department of Statistics at Harvard University. Before joining Harvard in October 2006, Stephen was Managing Director and head of the Global Rates proprietary trading group at Deutsche Bank in London, leading a team of professionals trading across fixed income markets.
Stephen joined Deutsche Bank in May 2003 from Morgan Stanley in New York where he was Managing Director in the Interest Rate Group, trading US interest-rate derivatives. He was previously Vice President in the Specialised Derivatives Group at HSBC.
Stephen holds a PhD in Statistics from Harvard University and an MA in Mathematics from Christ’s College, Cambridge University. After graduating from Harvard he was a Lecturer in the Department of Mathematics at Imperial College London. Stephen has published in both academic and industry journals and is a frequent invited speaker at international finance conferences.