Mengutip dari paragraf di bawah, "The pileup in statistical arbitrage also suggests what will next happen in the area, Lo says. People who lost a huge amount of money will get out of the strategy, he says. Volatility will increase because the statistical arbitrage dampers are removed. Eventually, the profitability of the strategy will rise and the cycle may begin again, he says.-"
Best regards, Jerry -- In AhliKeuangan-Indonesia@yahoogroups.com, "muhammad_az" <m_alfa...@...> wrote: > > `I realized that the behavioral finance folks and > the efficient-markets folks were both right,' > > > Evolving Markets > Jason Grow > > `I realized that the behavioral finance folks and > the efficient-markets folks were both right,' Lo says. > MIT's Andrew Lo applied evolutionary theory to finance. Among the predictions > of > his adaptive-markets hypothesis: a boom of new hedge funds. By JON ASMUNDSSON > > When former federal reserve > Chairman Alan Greenspan testified > before Congress last October > on the financial crisis, he > described the shock he'd felt when the belief he'd > had for more than 40 years in the self-sufficiency of > the free-market system turned out to be wrong. > "I found a flaw in the model that I perceived as > the critical functioning structure that defines how > the world works," Greenspan told lawmakers. > For Andrew Lo, a finance professor at the Massachusetts > Institute of Technology in Cambridge, > it was a sad moment. That's because the upheaval > that shook Greenspan wasn't necessarily proof > that free markets were defective, Lo says. Rather, > it reflects an evolutionary process. "Greenspan > wasn't wrong before, and he isn't necessarily > right now," Lo says. "It's just > that he was observing different phases > of the market cycle." > Market cycles are the kinds of phenomena > that can be explained by the > adaptive-markets hypothesis, a financial > theory Lo developed a decade ago that > incorporates insights from the study of > evolution in biology. Under the hypothesis, > investors with similar aims or strategies > pension funds or market makers, for > exampleare "species." And as in nature, market > species compete and proliferate when successful > and get weeded out when unsuccessful. Not only can > those processes drive booms and busts, they can also > affect how markets themselves operate. "Markets > are an evolutionary adaptation that humans developed > to deal with the problem of allocating resources > among large groups of individuals efficiently," Lo > says. "Over long periods of time, there will be certain > subperiods when markets behave in the way that we > think they ought toefficientlybut then there are > other periods when they behave much more emotionally. > That's what we're seeing now." > besides teaching finance at MIT, Lowho was > born in Hong Kong, lived in Taiwan until age 5 and > then grew up in Queens, New Yorkis director of > the MIT Laboratory for Financial Engineering. The > 49-year-old also is founder, chairman and chief > scientific officer of Cambridge-based hedge fund > AlphaSimplex Group LLC, which was acquired by > Boston-based Natixis Global Asset Management > in 2007. > Lo says he developed the adaptivemarkets > hypothesis in the late 1990s as a > way to respond to behavioral finance's > criticisms of the widely taught > efficient-markets hypothesis. "Back then, there > were two camps: There was efficient markets and > behavioral finance, and neither party was really > gaining the upper hand," Lo says. The impasse was > frustrating for students, who would ask professors > which of the contradictory ideas was correct. > The efficient-markets hypothesis, which was > formulated separately in the 1960s by MIT's Paul > Samuelson and the University of Chicago's Eugene > Fama, holds that when prices fully reflect all available > information, their subsequent moves must be > random and can't be forecast. That makes it hard > to beat the market. Underlying efficient-markets > thinking is the assumption of rational expectations > the idea that people on average will process > information correctly. Not so, say advocates of > behavioral finance, which taps methods from psychology. > Its experiments show that people often > make mistakes and can be irrational or even stupid, > Lo says. Markets thus can't be efficient, and it > should be easy to exploit inefficiencies to make > money. Yet, as many investors can attest, beating > the market still isn't easy, Lo says. > "Efficient markets has given us all kinds of powerful > tools such as diversification, > indexation, risk management, performance > attribution, alpha, betaall of > these really useful ideas," Lo says. "Do > we have to throw them all out?" > Behavioral finance doesn't offer an > alternative framework, Lo says; its > proponents only point out that people > overreact, follow herds or have various > biases. "How do we take that into > account and construct an optimal > asset allocation algorithm?" he says. > After years of grappling with this > conflict, Lo says it finally dawned on > him that there wasn't any conflict. > Instead, what was happening was like > the Indian legend in which six blind > priests come upon an elephant, Lo says. > One priest feels the elephant's leg and > announces that an elephant is like a > tree, another feels its side and declares > it's like a wall, and so forth. "I realized that the behavioral > finance folks and the efficient-markets folks > were both right," he says. "They were both observing > the same phenomenon, but from different angles." > The adaptive-markets hypothesis reconciles > the two views by saying that markets are neither > exclusively efficient nor always behavioral > they're both. "Behavior is really the outcome of > interactions between our logical faculties and our > emotional responses," Lo says. When logic and > emotions are in proper balance, markets operate > in a relatively efficient manner: Trading in U.S. > government debt is usually an example, Lo says. > "During normal times, the U.S. Treasury market is > an extraordinarily difficult market to make money > in; the pricing is extremely narrow and the markets > are very liquid," he says. > That doesn't mean that the Treasury market > works well all the time, Lo says. He points out that > yields on Treasury bills were negative at the end of > last year and again in March, meaning that buyers > were willing to pay more for the securities than > they would receive back in principal and interest. > "How can that be?" Lo says. "It's ridiculous! Well, > it's not ridiculous when you think about the mass > panic that has ensued because of this crisis." Type > USGG1M <Index> GY <Go> to use the Yield Chart > function to graph the yield on the generic onemonth > Treasury bill. > lo first published his adaptive-markets hypothesis > in 2004 in the Journal of Portfolio Management. > "The theory as I proposed it was a very loosely > stated and broad philosophical perspective, and I > did that really because I wanted to challenge both > academia and the industry to start thinking along > these lines," Lo says. In part, that's because analyzing > markets using the theory will require identifying > who the different types of market participant > species are and then coming up with a different > set of data on how they interact and how markets > evolve over time. To do that, Lo has focused on > hedge funds. "The hedge fund industry in my view > is the Galapagos Islands of finance," Lo says, referring > to the archipelago off Ecuador whose unique > species helped Charles Darwin formulate the theory > of evolution by natural selection. "In the hedge > fund industry, we can see the rate of evolution happening > before our very eyes." > As an example of hedge fund evolution, Lo points > to the August 2007 "quant quake," the big losses that > shook statistical arbitrage funds such as Goldman > Sachs Group Inc.'s Global Equity Opportunities > fund, which lost 28 percent for the month, according > to Bloomberg News reports. Statistical arbitrage > strategies are often "market neutral" since they use > computer algorithms to bet on stocks reverting to > their historical relationships with one another, buying > some and selling short others. Gains from market > moves in either direction should offset losses. > "August 2007 was a situation in which stat-arb > managers got crushed for no apparent reason that > we can tell from looking at markets, other than that > there was a credit crisis and maybe some margin > calls on the part of large firms," Lo says. By contrast, > in 1998, when a similar situation unfolded following > the collapse of Long-Term Capital Management LP, > statistical arbitrage funds weren't rocked in the > same way, Lo says. "So one question is, Why wasn't > there a `quant quake' in August 1998?" he says. From > the efficient-markets perspective, the similar situations > should have had similar results but didn't. > From the adaptive-markets perspective, there's a > simple explanation, Lo says. Back in 1998, there > wasn't enough money in the strategy so that one or > more funds selling their positions would spark such > a chain reaction, he says. The amounts involveda > few hundred million dollars or even a few billion > weren't enough to have a major impact on prices. > In 2007, when tens of billions were involved, the > chances that a cascade effect would occur were > much greater, Lo says. Such considerations are in > effect new sources of risk. Just as investors gauge > the sensitivity of a stock to the broader market with > beta, they'll need to measure the sensitivity of a > security's price to things such as asset flows, carry > trades and commodity prices, Lo says. "We're going > to have multiple betas emerge because there are so > many assets chasing all of these various strategies." > lo says that adaptive markets can also explain how > so much money ended up in statistical arbitrage. > During the 1990s, pension funds started putting > money into such funds because of their relatively > low volatility and their consistent performance, Lo > says. As more money was applied to the strategy in > the 2000s, the volatility of all U.S. stocks declined. > The reason: Statistical arbitrage is a form of meanreversion > strategy, Lo says. "You buy the losers and > sell the winners," he says. "If you are putting more > and more money into the buy-the-losers-sell-thewinners > trade, what that does is that it dampens > fluctuations." Type SPX <Index> HVG <Go> to use > the Volatility Graph function to chart swings in the > Standard & Poor's 500 Index. "Year by year by year, > the volatility of the S&P 500 went down as the statarb > assets went up," Lo says. > As volatility declined, investors perceived the > market to be less risky and increased their leverage, > Lo says. "The leverage built up into a crescendo > in 2007, when there was so much money in stat > arb that even a slight bump in the road caused this > major pileup," he says. > The pileup in statistical arbitrage also suggests > what will next happen in the area, Lo says. People > who lost a huge amount of money will get out of the > strategy, he says. Volatility will increase because the > statistical arbitrage dampers are removed. Eventually, > the profitability of the strategy will rise and the > cycle may begin again, he says. > What happens in financial markets is like biology's > "punctuated equilibrium," in which evolutionary > changes happen in bursts, Lo says. "There are > periods of enormous financial innovation: periods > when you've got lots and lots of flora and fauna > springing up to take the place of the previous inhabitants > of the ecology, he says." Since so many hedge > funds went out of business in 2007 and 2008, an > unprecedented number of hedge funds will be coming > into existence in the next year or two to take > their place, Lo says. Type HFND <Go> 11 <Go> to > display a list of recently launched hedge funds. > "We've just had our meteorite hit the financial markets > last year, and that's killed off a whole generation > of different species," Lo says. "We're going to > create a lot of new growth and new financial innovation > in the coming years." > > Jon Asmundsson is Strategies editor of Bloomberg > Markets. jasmunds...@... >
