What happened to the quants in August 2007? Evidence from factors and transactions data

Amir E. Khandani and Andrew Lo ()

Journal of Financial Markets, 2011, vol. 14, issue 1, 1-46

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.

Keywords: Systemic; risk; August; 2007; Hedge; funds; Market-making; Flash; crash (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (107)

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Working Paper: What Happened To The Quants In August 2007?: Evidence from Factors and Transactions Data (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:14:y:2011:i:1:p:1-46

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