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analysis of financial markets, mid-March 2020?
Grant Kiehne
posted
Finance Theory Seeking Help Case Studies Fundamentals

Anyone seen detailed analysis of what happened in the financial markets in mid-March 2020? And how things were turned around? It sure seems like there was a trend toward everything freezing up, with across-the-board correlations. I recall we had a similar situation in 2008, when we were on the brink of disaster (the cause was different, but the systemic fragility would seem to be the same).

I'm looking for something along the lines of white papers or academic papers, versus a speculative, sensational media article.

On a related note, I'm wondering if equity long-short hedge fund strategies worked at all (the variety that Quantopian was trying to get off the ground)? Of course, if leveraged by many multiples, then if the slightest thing is off, you are screwed.

3 responses
Alan Coppola

@Grant,
Here are a couple of Q forum/external posts:

  1. https://www.quantopian.com/posts/three-quant-lessons-from-covid-19
  2. Slides: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3562025
  3. https://www.quantopian.com/posts/pandemic-event-and-long-slash-short-equity-portfolios

My cut, based on my reading and personal experience is that COVID :
1. Was a White Swan event, and could be seen coming down the road with respect to a long-short equity fund if you had signals in place to detect regime change.
2. When it happened, it was too late, and the actual speed of the transition(especially the speed of unwinding / executing shorts) was not in-sync with the speed of rebalancing your long-short portfolio.
3. In my own personal micro-case, with a non-neutral long-short portfolio, I had to panic-dump everything by hand in mid-March to minimize losses, when I no longer believed in the forecasting the model was telling me. Very instructive! Very painful! Jumped back in a week later with a few regime change checks in place, and a more healthy respect for the practicalities of shorting.
alan

Grant Kiehne

Thanks Alan -

When I get the chance, I'll see what else I can dig up and post my findings here.

Grant Kiehne

I recently watched a Netflix biographical documentary on Hank Paulson (https://www.netflix.com/title/70293130) and his management of the financial crisis (I highly recommend the documentary). We were very close to everything locking up. I get the impression, once again, we had the same risk in 2020. There's some key characteristics of the financial system that are going under-reported, as far as I can tell. It's a very fragile system, but maybe there's not way around it.

I suppose if one can always count on the government coming to the rescue, there's no need to spend the money on a hedge. One would assume that the federal government views the entire global financial system as "too big to fail" and would always come to the rescue (versus individual companies, e.g. Lehman, being allowed to fail sometimes).

Debt/leverage seems to play a key role. I gotta watch Dalio's video again "How The Economic Machine Works by Ray Dalio":

https://youtu.be/PHe0bXAIuk0

There's also the "Ascent of Money" documentary series (and book) by Niall Ferguson.

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