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acastaldo
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Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 3:15 pm

In the French newspaper Le Monde: Les maths sont un maillon de la crise mais pas decisifBut surely somebody is to blame ?Ms. El Karoui says it is someone else, who she calls "the financiers".
 
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Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 3:51 pm

Strictly speaking, this is true only in the proximate sense. It is true that quant methods did directly cause the asset bubble in housing, "relaxed" lending standards, inflated property appraisals, or fraudulent/risky/greedy/stupid approvals of loan applications. To that extent, the subprime side of this was a pure greed-driven asset bubble that no more required quants than the tulip bubble did. That said, quant methods amplified this crisis along two critical dimensions.First, quant methods surely allowed this bubble to expand far longer than it would have in pre-quant times. The ability to securitize and sell mortgage debt through complex structures was a quant creation. The ability to construct MBS allowed a far larger amount of capital to flow into housing that would have occurred in pre-quant days. Without the magic of tranches and credit default swaps, global investors would never have poured trillions into U.S. mortgages or been willing to lend at the ridiculously low rates that they did.Second, quant methods markedly increased the fragility of the system to de-leveraging. The entire notion that one could find a gnats ass of returns and amplify it with leverage was aided and abetted by quant methods. Quant methods provided the illusion of certainty that one could leverage to the hilt and then profit on the delta between LIBOR and subprime or alt-a loans. Quant methods increased the coupling of returns across assets and lead to strategies that were extremely sensitive to a liquidity crisis. Although subprime shenanigans created the seeds of destruction, quant-fueled leverage provided the fertilizer to sow that destruction across a much broader swath of the economy. Without quant methods, we may still have had a housing bubble. But without quant methods it would not have expanded as far or ruptured as violently.
Last edited by Traden4Alpha on March 29th, 2008, 11:00 pm, edited 1 time in total.
 
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ppauper
Posts: 70239
Joined: November 15th, 2001, 1:29 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 4:25 pm

QuoteOriginally posted by: acastaldoBut surely somebody is to blame ?Ms. El Karoui says it is someone else, who she calls "the financiers".ah, if you give money to idiots and they lose it, it's your own fault for giving it to them !
 
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ppauper
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Joined: November 15th, 2001, 1:29 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 4:29 pm

so she's saying that the models used only work under normal market conditions and not for bubbles.That falls under the category of "model risk", for which quants can indeed be blamed
 
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KackToodles
Posts: 4100
Joined: August 28th, 2005, 10:46 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 6:54 pm

QuoteOriginally posted by: ppauperso she's saying that the models used only work under normal market conditions and not for bubbles.That falls under the category of "model risk", for which quants can indeed be blamed she is basically saying "our models work when they work, and they don't work when they don't work." this is a tautology. bwahahahahaha. such can be said for ANY unreliable model.
 
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BullBear
Posts: 860
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Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 8:21 pm

El Karoui: "Nos modèles sont faits pour fonctionner dans des situations ordinaires, pour des quantités raisonnables de produits vendus, dans un contexte d'activité standard pour couper des pertes de 3 % à 5 %. Pas pour des périodes de surchauffe, de bulle."LOL / Ça me fait rir
 
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Anthis
Posts: 4313
Joined: October 22nd, 2001, 10:06 am

Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 8:56 pm

Why i am not surprised? She has a "high street shop", with "high goodwill" and goodwills are made through years, and destroyed within minutes...
 
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Broardview
Posts: 160
Joined: April 22nd, 2006, 2:42 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 10:17 pm

Why did not she say that quant can not do anything and quant position is just a job? Was it because she wanted to save her face?
 
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Broardview
Posts: 160
Joined: April 22nd, 2006, 2:42 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 10:17 pm

Does anyone have an encourage to her to come to this forum to read our postings? Maybe emailing her is a better way.
Last edited by Broardview on March 30th, 2008, 10:00 pm, edited 1 time in total.
 
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TraderJoe
Posts: 11048
Joined: February 1st, 2005, 11:21 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 30th, 2008, 10:46 pm

Ahh, isn't the blame game such fun!Greed has been around since the beginning of time (or since the serpent deceived Eve into taking a bite of the apple in the Garden of Eden - the beginning of our fall). Quants did NOT invent greed. Greed has been around long before quants roamed the trading floors and back offices of investment banks. Don't blame the quants. Blame it on the real culprit - it's alot more painful but nonetheless true - blame it on our own human weaknesses and free will.
Last edited by TraderJoe on March 30th, 2008, 10:00 pm, edited 1 time in total.
 
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unkpath
Posts: 289
Joined: January 13th, 2004, 8:44 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 31st, 2008, 12:03 am

oh yeah? and how does she know this? do you honestly believe that someone who has been working in academia for the last 40 years and teaches a subject with rigorous mathematical foundations that is loosely related to the subject of interest to practitioners of finance, would have any insight as to what is unfolding in front of our eyes? why do you even bring this up? If you had quoted Bernanke, or Trichet, or even someone from a french economics bureau, I would have given that more credit. I am actually quite annoyed by a couple of french pigistes/journalists working for le monde - the so called french quality centre-left newspaper - who set out every few months to write another highly inaccurate paper about how great things done in france just are, when it comes to quantitativefiance. it is always really always the same crap, like "70% of the quant population are french and come from el karoui's dea" or "you may not have known, but in actual fact french engineers are the smaterst in the world, but don't get this wrong, french engineers from ecole polytechnique are actually an orderof magnitude smarter than french engineers from ecole centrale, etc, etc..." . it's just ridiculous. french quants are ball park, that's it and that is great, but that's it. I wish my nation stopped having this eternal inferiority complex pushing some its citizen to permanently try to convince others, but especially themselves, that there is such a thing as the "exception francaise" and that, yes, they are actually fit to compete at all with the bad non-french and bad anglo-saxons, and do that by saying that they are just better than the rest. cut the crap. and what the hell does el karoui know about financial markets liquidity, cash supply, asset backed securities, etc... anyway. if she was smart she would have suggested the journalist that the question asked is an irrelevant question to ask in the first place... duh! QuoteOriginally posted by: acastaldoIn the French newspaper Le Monde: Les maths sont un maillon de la crise mais pas decisifBut surely somebody is to blame ?Ms. El Karoui says it is someone else, who she calls "the financiers".
 
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TraderJoe
Posts: 11048
Joined: February 1st, 2005, 11:21 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 31st, 2008, 12:12 am

QuoteOriginally posted by: unkpathoh yeah? and how does she know this? do you honestly believe that someone who has been working in academia for the last 40 years and teaches a subject with rigorous mathematical foundations that is loosely related to the subject of interest to practitioners of finance, would have any insight as to what is unfolding in front of our eyes? why do you even bring this up? If you had quoted Bernanke, or Trichet, or even someone from a french economics bureau, I would have given that more credit. I am actually quite annoyed by a couple of french pigistes/journalists working for le monde - the so called french quality centre-left newspaper - who set out every few months to write another highly inaccurate paper about how great things done in france just are, when it comes to quantitativefiance. it is always really always the same crap, like "70% of the quant population are french and come from el karoui's dea" or "you may not have known, but in actual fact french engineers are the smaterst in the world, but don't get this wrong, french engineers from ecole polytechnique are actually an orderof magnitude smarter than french engineers from ecole centrale, etc, etc..." . it's just ridiculous. french quants are ball park, that's it and that is great, but that's it. I wish my nation stopped having this eternal inferiority complex pushing some its citizen to permanently try to convince others, but especially themselves, that there is such a thing as the "exception francaise" and that, yes, they are actually fit to compete at all with the bad non-french and bad anglo-saxons, and do that by saying that they are just better than the rest. cut the crap. and what the hell does el karoui know about financial markets liquidity, cash supply, asset backed securities, etc... anyway. if she was smart she would have suggested the journalist that the question asked is an irrelevant question to ask in the first place... duh! And she's only very average in the field of mathematical finance anyway, and probably on the wane.TJ.
 
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TraderJoe
Posts: 11048
Joined: February 1st, 2005, 11:21 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 31st, 2008, 12:19 am

QuoteOriginally posted by: Traden4AlphaStrictly speaking, this is true only in the proximate sense. It is true that quant methods did directly cause the asset bubble in housing, "relaxed" lending standards, inflated property appraisals, or fraudulent/risky/greedy/stupid approvals of loan applications. To that extent, the subprime side of this was a pure greed-driven asset bubble that no more required quants than the tulip bubble did. That said, quant methods amplified this crisis along two critical dimensions.First, quant methods surely allowed this bubble to expand far longer than it would have in pre-quant times. The ability to securitize and sell mortgage debt through complex structures was a quant creation. The ability to construct MBS allowed a far larger amount of capital to flow into housing that would have occurred in pre-quant days. Without the magic of tranches and credit default swaps, global investors would never have poured trillions into U.S. mortgages or been willing to lend at the ridiculously low rates that they did.Second, quant methods markedly increased the fragility of the system to de-leveraging. The entire notion that one could find a gnats ass of returns and amplify it with leverage was aided and abetted by quant methods. Quant methods provided the illusion of certainty that one could leverage to the hilt and then profit on the delta between LIBOR and subprime or alt-a loans. Quant methods increased the coupling of returns across assets and lead to strategies that were extremely sensitive to a liquidity crisis. Although subprime shenanigans created the seeds of destruction, quant-fueled leverage provided the fertilizer to sow that destruction across a much broader swath of the economy. Without quant methods, we may still have had a housing bubble. But without quant methods it would not have expanded as far or ruptured as violently.It's not the methods that are to blame (a poor workman always blames his tools). People are to blame. And those people are the people who made decisions to lie and cheat to make a fast buck. You weren't a subprime salesman were you?
Last edited by TraderJoe on March 30th, 2008, 10:00 pm, edited 1 time in total.
 
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TraderJoe
Posts: 11048
Joined: February 1st, 2005, 11:21 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 31st, 2008, 12:33 am

QuoteOriginally posted by: TraderJoeQuoteOriginally posted by: unkpathoh yeah? and how does she know this? do you honestly believe that someone who has been working in academia for the last 40 years and teaches a subject with rigorous mathematical foundations that is loosely related to the subject of interest to practitioners of finance, would have any insight as to what is unfolding in front of our eyes? why do you even bring this up? If you had quoted Bernanke, or Trichet, or even someone from a french economics bureau, I would have given that more credit. I am actually quite annoyed by a couple of french pigistes/journalists working for le monde - the so called french quality centre-left newspaper - who set out every few months to write another highly inaccurate paper about how great things done in france just are, when it comes to quantitativefiance. it is always really always the same crap, like "70% of the quant population are french and come from el karoui's dea" or "you may not have known, but in actual fact french engineers are the smaterst in the world, but don't get this wrong, french engineers from ecole polytechnique are actually an orderof magnitude smarter than french engineers from ecole centrale, etc, etc..." . it's just ridiculous. french quants are ball park, that's it and that is great, but that's it. I wish my nation stopped having this eternal inferiority complex pushing some its citizen to permanently try to convince others, but especially themselves, that there is such a thing as the "exception francaise" and that, yes, they are actually fit to compete at all with the bad non-french and bad anglo-saxons, and do that by saying that they are just better than the rest. cut the crap. and what the hell does el karoui know about financial markets liquidity, cash supply, asset backed securities, etc... anyway. if she was smart she would have suggested the journalist that the question asked is an irrelevant question to ask in the first place... duh! And she's only very average in the field of mathematical finance anyway, and probably on the wane.TJ.As for the Financial Modelling Group at Ecole Polytechnique. OK, so Rama Cont and Peter Tankov (1995 - 1998 St. Petersburg State University, department of physics; major: quantum field theory) are there, but that's about it.
Last edited by TraderJoe on March 30th, 2008, 10:00 pm, edited 1 time in total.
 
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Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Prof. El Karoui says quants not to blame for subprime meltdown

March 31st, 2008, 12:56 am

QuoteOriginally posted by: TraderJoeQuoteOriginally posted by: Traden4AlphaWithout quant methods, we may still have had a housing bubble. But without quant methods it would not have expanded as far or ruptured as violently.It's not the methods that are to blame (a poor workman always blames his tools). People are to blame. And those people are the people who made decisions to lie and cheat to make a fast buck. You weren't a subprime salesman were you?Just to make sure that I understand you. All the derivatives prices generated by all the models were correct?It was just the people, not the tools? So all the quants employed in all the financial centers were complicit in this not so little fraud? If so, I'm surprised you are training to join this seemingly sordid nest of thieves.I absolutely don't "blame the tools" although the use of quant tools -- even nonfradulent use of the tools -- exacerbated the consequences. Quant tools in the context of the subprime meltdown are like a baby that vomits on a Savile Row suit. One doesn't blame or discard the baby/tools because of an event like this. But one does learn to watch what one feeds the baby/tools. And one certainly learns to be more circumspect with the baby/tools around expensive things such as bespoke suits and global economies. In short, the math is good, but it has some significant limits that lead to unpleasant consequences when leveraged too far on things that really matter.
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