30 March 2021

Quants' Hubris - part the fifth

Blythe Masters rides again!

By now you all have heard/read about the mess Archegos has made of the financial structure. So far, at least, it doesn't appear to have the horsepower to bring down the whole kit-and-kaboodle the way her credit default swap did. But both situations share a characteristic.
Much of the leverage used by Hwang's Archegos Capital Management was provided by banks including Nomura Holdings and Credit Suisse Group through swaps or so-called contracts-for-difference (CFDs) , according to people with direct knowledge of the deals. It means Archegos may never actually have owned most of the underlying securities — if any at all.
So, just like CDS, a pure bet on 'something'. No questions asked.
CFDs and swaps are among bespoke derivatives that investors trade privately between themselves, or over-the-counter, instead of through public exchanges. Such opacity helped to worsen the 2008 financial crisis and regulators have introduced a vast new body of rules governing the assets since then.
So, yeah, there is the risk that other Big Banks were/are doing exactly the same thing with/for other hedgeis behind everybody else's back.

How do a quant predict the future when the present is completely without data?

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