Midas Formula Case Study

1229 Words 5 Pages
Jervand Asatrjan

1)summary of the major theme regarding the ability of quantitative financial models to consistently earn abnormally high returns? Why or Why not?

Two risky positions taken together can eliminate risk idea stems from the Midas formula. The reason this was an important concept due to the discovery from a blind test that prices moved at random. Scientists made a conclusion that prices are not predicted by the investors rather it is by chance that some investor makes a very profitable investment. Academics decided to set out to find a scientific way to predict the markets and eliminate the uncertainty. Popular method to control risk is by quantifying probability by measuring how much prices moved in the past and calculated
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Once the model was created the formula was used. Finally, a formula was created that could remove the risk from investments. Many financial derivatives were invented to exploit the BS formula. So after the academics received the Nobel price, LTCM (long term capital management) was created (smart guys going to the market). In 1995 the hedge fund LTCM (long term capital management) was created. The Nobel prize winners had no problem raising the capital and became what could be the team of the century. Within months $3bill raised. Started investing. Nobody could know what they are doing and kept all of the strategy in secrecy and were able to use dynamic hedging and have above average returns. LTCM outperformed all in the first year 20% gains, second43% third 41%, but market dynamics started changing with Thailand property crisis banks collapsed and mathematical models started failing. Models were giving strange results. Traders stopped borrowing and started investing risky. But LTCM models told a different story. LTCM continued to follow the models and borrowed even more (100BILL). but the market kept testing and doing the

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