IV: Derivative asset pricing, Aspects of the financial system

Question 1

Alpha or beta in the eye of the beholder: What
drives hedge fund flows?
Agarwal, Vikas, Clifton T. Green, and Honglin Ren, 2018

What is “flow-performance horse race”?

Answer 1

Which model’s alpha predicts the CFs of the hedge fund the best.

Question 2

Alpha or beta in the eye of the beholder: What
drives hedge fund flows?
Agarwal, Vikas, Clifton T. Green, and Honglin Ren, 2018

Hedge funds are using more exotic strategies than ever before. How the investors evaluate hedge fund’s performance?

Answer 2

They use CAPM. The probability that the sign of the fund flow (positive or negative) depends on the alpha is the highest for CAPM, the simplest model.

Question 3

Alpha or beta in the eye of the beholder: What
drives hedge fund flows?
Agarwal, Vikas, Clifton T. Green, and Honglin Ren, 2018

To which components can hedge fund’s returns be decomposed? To which factors are the returns the most sensitive to?

Answer 3

Alpha, traditional risk factors & exotic risk factors. Investor flows respond to all 3 return components, but emphasis on exotic factors is larger than on traditional factors.

Question 4

Alpha or beta in the eye of the beholder: What
drives hedge fund flows?
Agarwal, Vikas, Clifton T. Green, and Honglin Ren, 2018

What does it mean if the risk exposure (beta) persistence?

Answer 4

Hedge funds follow certain strategies for risk exposures, but future returns to those exposures are not predictable from the recent returns to those exposures.

Question 5

Alpha or beta in the eye of the beholder: What
drives hedge fund flows?
Agarwal, Vikas, Clifton T. Green, and Honglin Ren, 2018

What investors are more sensitive to returns associated with exposure to exotic risk?

Answer 5

The ones who pay higher performance fees?

Question 6

Alpha or beta in the eye of the beholder: What
drives hedge fund flows?
Agarwal, Vikas, Clifton T. Green, and Honglin Ren, 2018

Hedge funds that deliver higher alphas, charge higher fees, but traditional and exotic risk components do not differ much across the funds. What does that mean?

Answer 6

Higher-fee funds charge for the skill that they earn with, not exposures to exotic risks.

Question 7

Alpha or beta in the eye of the beholder: What
drives hedge fund flows?
Agarwal, Vikas, Clifton T. Green, and Honglin Ren, 2018

How do funds of funds investors evaluate fund’s performance?

Answer 7

No evidence that funds of funds evaluate performance using more sophisticated models than other hedge fund investors, but they are more sensitive to exotic returns.

Question 8

Alpha or beta in the eye of the beholder: What
drives hedge fund flows?
Agarwal, Vikas, Clifton T. Green, and Honglin Ren, 2018

What can be concluded about the investors of the hedge funds?

Answer 8

Emphasis on CAPM does not reflect a lack of awareness of untraditional risks, but rather a specific tendency of investors to chase recent returns associated with both traditional and exotic risk exposures
As the returns to factors do not persist, this is not an optimal practice, instead of looking at how much exotic risks contributed to recent returns, investors should employ more sophisticated models and separate traditional and exotic risks. This would help them allocate capital between cheap mutual funds or ETFs (where they can get exposed to traditional factors) and hedge funds with exotic exposures.

Question 9

A 30-Year Perspective on Property Derivatives:
What Can Be Done to Tame Property Price Risk?
Fabozzi, Frank J., Robert J. Shiller, and Radu S. Tunaru, 2020

What do the authors mean by saying that the market for property derivatives is “in a state of infancy”?

Answer 9

Property derivatives require a more complex process to be generally accepted by financial market participants.
In particular, more needs to be done on the modelling side to facilitate pricing and hedging in this incomplete market. The ultimate goal is for property derivatives to be traded as a standard commodity, similar to the way that futures, options, and swaps are traded for stock and bond indexes.

Question 10

A 30-Year Perspective on Property Derivatives:
What Can Be Done to Tame Property Price Risk?
Fabozzi, Frank J., Robert J. Shiller, and Radu S. Tunaru, 2020

What is a reverse mortgage?

Answer 10

A homeowner receives periodic payments for a fixed period or life, secured by the value of the property that will be sold after death. Reverse mortgages may be especially beneficial for elderly households with low income, poor health, and limited non-housing wealth.

Question 11

A 30-Year Perspective on Property Derivatives:
What Can Be Done to Tame Property Price Risk?
Fabozzi, Frank J., Robert J. Shiller, and Radu S. Tunaru, 2020

What are the advantages of property derivatives?

Answer 11

1. Information about future prices of property can be extracted
2. Housing price risk can be be hedge
3. One can get exposure to real estate without owning it (diversification).
4. Reverse mortgage can be designed.

Question 12

A 30-Year Perspective on Property Derivatives:
What Can Be Done to Tame Property Price Risk?
Fabozzi, Frank J., Robert J. Shiller, and Radu S. Tunaru, 2020

What caused the rise of the property derivatives in 1970s?

Answer 12

1. Acceleration of property price growth: before that, the prices were mostly rising slowly
2. Unpreparedness of covered mortgages and MBS for elevated inflation of 1970s
3. Shift to adjustable rate mortgages: previously, mortgages have been balloon payments.
   Overall, some property derivatives have been developed since then, but none of them has become truly widespread. Crisis in subprime lending (and thus GFC) also did not help the initiatives.

Question 13

A 30-Year Perspective on Property Derivatives:
What Can Be Done to Tame Property Price Risk?
Fabozzi, Frank J., Robert J. Shiller, and Radu S. Tunaru, 2020

What are the obstacles in property development derivatives?

Answer 13

!!!

◦ Index construction mismatch
◦ There are various ways how to measure the real estate market value (new sales or listed prices, national or
regional, rural or urban, etc.)
◦ Matching the timing of the real estate index to the property derivatives
◦ Negligible liquidity: who would be willing to provide insurance against a fall in prices?
◦ On the sell side are all those concerned about a possible price decline. But who would be on the buy side? Youngsters who want to hedge against too much housing price increase?
Likely too few of them. Perhaps, big asset managers who want to be exposed to real estate.
◦ Modelling considerations: arbitrage condition is not a good condition for real estate derivatives, so
creating a pricing model is a challenge
◦ Regulatory issues: as a result of GFC and Basel III Accord, trading property derivatives became very
capital-intensive for banks, so they quit the market

Question 14

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

The authors compare mutual funds and hedge funds. Mention at least five differences between mutual and hedge funds. One sentence per each is enough.

Answer 14

Hedge funds are relatively unregulated, managers have a great deal of flexibility in strategies (short positions, borrowing, extensive use of derivatives). Aggressive and risky strategies. No disclosure required, although might be provided voluntarily typically to attract funds. Lack of disclosure makes proper risk evaluation very difficult but strategies protected. Small in size, but require a large initial investment. Active only. Securities are issued privately; investors must meet SEC requirements (knowledge, wealth, capacity to bear losses). Fund flows are less sensitive to short-term performance → more opportunity to engage in complex strategies. A hedge fund can reject an investor.
Mutual funds are heavily regulated with respect to risk level, managers’ compensation, governance, etc. Disclosure and reporting are required, audit. Typically large in size with a small initial investment required. Active/passive. Almost anyone can become an investor by buying fund’s shares. Therefore, fund flows are sensitive to short-term performance, which also constrains the type of strategies a fund manger can employ.

Question 15

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

Please challenge the conclusions made by the authors! Recall at least three problems the authors faced and that could affect their results/conclusions.

Answer 15

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Question 16

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

Only a handful of hedge funds have ever grown to exceed $1 billion in AUM, while many more mutual and exchange-traded funds have done so rather quickly. Explain why this might be so from the point of view of the returns to scale of hedge fund strategies.

Answer 16

Hedge fund strategies involves hedging the risk and, thus, on average does not outperform ETFs/market indexes.

Question 17

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

Long-Term Capital Management (often referred to as LTCM) was a large hedge fund, led by Nobel Prize-winning economists and renowned Wall Street traders, which collapsed in 1998. One of the differences in the regulation of hedge funds and mutual funds is the mandatory disclosure condition. Why do some hedge funds choose not to disclose their trades, and what
are the costs and risks behind it? How is the hedge fund client selection different from that of
the mutual funds?

Answer 17

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Question 18

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What is the purpose of mutual fund and how does it differ from the purpose of a hedge fund?

Answer 18

The purpose is the same - provide positive returns for investor.

Question 19

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

How does close-end and open-end mutual fund differ?

Answer 19

Closed-end funds: shares are listed on an exchange and are traded like stocks throughout the market hours, no
creation/redemption.
Open-end funds: create/redeem shares based on net asset value (NAV) at the end of the trading day.

Question 20

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What are the characteristics of hedge funds?

Answer 20

1. freedom in strategies (more than mutual funds)
2. harsh entrance and exit conditions
3. not traded on an exchange
4. the least accessible type; designed for sophisticated investors.
   All hedge funds and some mutual funds have active management style, but mutual funds may also have a passive management style.

Question 21

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

How are ETFs traded?

Answer 21

Traded throughout the market hours like closed-end funds, but can be created/redeemed (similar to open-end) on the primary market by authorised participants; the most accessible type. ETFs are typically passive in a sense that they follow a predefined index.

Question 22

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What are funds of funds?

Answer 22

A hedge fund that invests in individual hedge funds and monitors these investments, thereby providing investors a diversified portfolio of hedge funds, risk management services, and a way to share the due diligence costs with other investors.

Question 23

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What are the differences between manager’s evaluation (and compensation) mutual funds vs. hedge funds?

Answer 23

Hedge fund’s manager pursue absolute returns rather than returns in excess of a benchmark (fund returns do not depend on market returns), compensation is about 1-2% of AUM and 15-25% above the hurdle rate. Managers get compensated only once the loss is recovered (although it should control risk-taking, most typically a fund closes after experiencing large losses); if gains are large, compensation will rise as well.
Mutual fund’s manager’s evaluation is relative to a benchmark and the compensation mostly depends on assets under management (AUM), symmetric. Typically cheaper than hedge funds.

Question 24

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What kind of activities do dominate in hedge fund strategies?

Answer 24

1. Find trades that are almost an arbitrage opportunities.
2. Once the mis-pricing is identified, the hedges are placed such that the fund would benefit from the correction of it.
3. Derivatives & short positions are a critical tool for arbitrage opportunity realisation more aggressively.

Question 25

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What kind of returns can be expected from the hedge funds?

Answer 25

Hedge funds become market-neutral over time: hedge funds are expected to have average performance whether equity markets have extremely good or bad performance. It is therefore not surprising that hedge funds performed well when U.S. Equity markets registered sharp losses in the wake of the collapse of Internet stocks (Dotcom bubble).

Question 26

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What are the advantages and disadvantages of the requirements of information disclosure for hedge funds?

Answer 26

The strategies can be kept inside the fund.
Questionable activities can be seen FISHY:) : e.g. insider trading.

Question 27

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What are the strategies hedge funds engage in?

Answer 27

◦ Long-short equity strategy (31%): take long and short positions in different stocks; hedge positions against market risks. A typical strategy is to identify undervalued and overvalued stocks.
◦ Event-driven (20%): take advantage of opportunities created by significant transactional events, such as spin-offs, mergers and acquisitions, reorganisations, bankruptcies, and other extraordinary corporate transactions. Event-driven trading attempts to predict the outcome of a particular transaction as well as the optimal time at which to commit capital to it.
◦ Macro hedge fund (10%): identify mis-priced valuations in stock markets, interest rates, foreign exchange rates, and physical commodities and make leveraged bets on the anticipated price movements in these markets (extensive use of macroeconomic and political analysis).
◦ Fixed-income arbitrage (8%): find arbitrage opportunities in the fixed-income markets.
◦ Multi-strategy funds (13%), i.e., they combine 2 or more different strategies.

Question 28

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

Which show the better performance: hedge or mutual fund?

Answer 28

◦ Return: 10.8% for hedge funds and 10.3% p.a. for mutual funds.
◦ Risk: 7.8% and 14.5% → remember hedge funds are less market-dependent.
◦ Alpha (net of fees): positive for hedge funds (although studies vary in conclusions) and zero or negative for
mutual funds (on average).

Question 29

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What are the three expectations for hedge funds?

Answer 29

1. Hedge funds will perform worse in the future in terms of alpha due to diseconomies of scale of their strategies (the more participants look for mis-pricing, the quicker it is eliminated).
2. Hedge funds will gain more institutional investors who will not be able to give them completely free hand → more emphasis on disclosure, transparency, liquidity, risk management, less on managers’ skills → convergence of mutual and hedge funds; hedge funds can start offering more services (like mutual funds) based on their reputation.
3. Hedge funds will become more regulated as they expand their business (lending, activist investing), also mutual funds lobby for more constraints.

Question 30

Hedge Funds: Past, Present, and Future
Stulz, Rene M., 2007

What are the risks the hedge funds create for the economy?

Answer 30

Investor protection.
Risks to financial institutions that are exposed to hedge funds as the latter borrow from them, make
securities transactions and are often counter parties in derivatives trades: e.g. when the Long Term Capital Fund lost more than $4bn in 1998, the Federal Reserve Bank of New York organised a rescue by private banks to avoid possible widespread damage from a possible disorderly liquidation or bankruptcy of the fund. Response: this is not specific to hedge funds, so financial institutions should be regulated not to take too
much exposure.
Liquidity risks: hedge funds rely on their ability to move out of trades quickly when prices turn against them; adverse shocks could lead hedge funds to dump securities and cash out precisely when things are going poorly, which could make matters worse. Response: serious issue in theory, but hedge funds tend to perform well in distress; also, regulation should anyway be banks-focused, not hedge fund-focused.
Excess volatility risks: hedge funds could lead prices to overreact by making trades that push prices away from fundamental values. Response: hedge funds also help eliminate mis-pricing, should look at net effect (no hard
evidence).

Question 31

Anomalies: The Law of One Price in Financial Markets
Lamont, Owen A. and Richard H. Thaler, 2003

What is LOOP?

Answer 31

If there are no transaction costs or other constraints, e.g., short selling, then identical goods must have identical prices

Question 32

Anomalies: The Law of One Price in Financial Markets
Lamont, Owen A. and Richard H. Thaler, 2003

What does violate the LOOP?

Answer 32

◦ Agents who believe falsely that there are real differences between two identical goods
◦ Rational arbitrageurs are prevented from restoring the equality of prices that rationality predicts

Question 33

Anomalies: The Law of One Price in Financial Markets
Lamont, Owen A. and Richard H. Thaler, 2003

What is closed-end country fund? Comment or their discounts/premia.

Answer 33

A mutual fund which issues fixed amount of shares at a single IPO for capital raising of its initial investment. Traded in US exchanges, invest heavily in outside markets.
The miss-pricing can be justified because of management fees, managers skill of stock picking.

Question 34

Anomalies: The Law of One Price in Financial Markets
Lamont, Owen A. and Richard H. Thaler, 2003

What is ADR, American Depositary Receipt?

Answer 34

Negotiable certificate issued by bank representing shares in a foreign company traded at a local exchange, created to have easier access for US investors to own stock of a foreign company.

Question 35

Anomalies: The Law of One Price in Financial Markets
Lamont, Owen A. and Richard H. Thaler, 2003

What is a twin share?

Answer 35

By some firms offered shares of two types with different, fixed rights on cash flows and assets of the firm. The shares are highly liquid.

Question 36

Anomalies: The Law of One Price in Financial Markets
Lamont, Owen A. and Richard H. Thaler, 2003

What are the dual-class shares?

Answer 36

Shares traded by the same company, usually at a similar price, with different voting rights.

Question 37

Anomalies: The Law of One Price in Financial Markets
Lamont, Owen A. and Richard H. Thaler, 2003

What is a corporate spinoff?

Answer 37

Creation of independent company, by splitting from the original one and issuing or distributing new shares of the original business.

Question 38

Anomalies: The Law of One Price in Financial Markets
Lamont, Owen A. and Richard H. Thaler, 2003

Why might it be difficult to exploit arbitrage by short selling if the shares are held by the retail investors (at a spinoff)?

Answer 38

Institutional investors might be more keen on borrowing/lending the shares for a short sell, than the retail investors.

Question 39

Anomalies: The Law of One Price in Financial Markets
Lamont, Owen A. and Richard H. Thaler, 2003

Does the reading prove that markets are not perfect?

Answer 39

Non of the cases prove that LOOP does not hold effectively enough for no conteragumentation.

Question 40

Towards a Political Theory of the Firm
Zingales, Luigi, 2017

What is “goldilocks” balance?

Answer 40

The ideal balance between affairs of the state power and power of firms.

Question 41

Towards a Political Theory of the Firm
Zingales, Luigi, 2017

What is Medici Vicious Cycle?

Answer 41

When money is used to gain political power and political power is then used to make more money.

Question 42

Towards a Political Theory of the Firm
Zingales, Luigi, 2017

Why the market power of US firms has been increasing?

Answer 42

Less creation of new firms & high level of merger activity.

Question 43

Towards a Political Theory of the Firm
Zingales, Luigi, 2017

Why the power political of firms in US has increased in last 30 years?

Answer 43

◦ The size and market share of companies has increased → lower competition; corporations are more powerful
vis-à-vis consumers’ interest
◦ The size and complexity of regulation has increased → makes it easier for vested interests to tilt the playing field to their advantage
◦ Demise of the antibusiness ideology that previously prevailed among Democrats, and this has reduced the costs of being perceived as too friendly to the interests of big business for both parties.

Question 44

Towards a Political Theory of the Firm
Zingales, Luigi, 2017

Why the goldilocks is more likely when political power is based on social consensus rather then brutal force?

Answer 44

Media is less likely to be influenced by government and corporate (ownership, sponsorship, censorship).
Electoral process is less likely to be influenced by private donations.
The prosecutorial and judiciary powers are more likely to be impartial.

Question 45

Towards a Political Theory of the Firm
Zingales, Luigi, 2017

What are the factors which determine the possibility and the extent of medici Vicious Cycle?

Answer 45

1. Main source of political power
2. Independence of the media, jurisdictional powers
3. Ideology
4. Regulation of financing

Question 46

Towards a Political Theory of the Firm
Zingales, Luigi, 2017

How to limit the risk of modern corporations?

Answer 46

1. Increase transparency in corporate activities
2. Broaden public awareness
3. Improve corporate democracy
4. Better use of antitrust authorities
5. Independence of media

Question 47

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

What is Moore’s Law in financial markets?

Answer 47

The phenomenon of US stock market doubling every decade (1929-2009).

Question 48

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

What is Murphy’s Law in financial markets?

Answer 48

A belief that anything that can go wrong will go wrong.

Question 49

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

What is algorithmic trading (AT)? What are the benefits of it?

Answer 49

Automatised financial security selling & buying process (using mathematical models, technology, etc.).
Higher productivity & scalability; lower costs & reduced human error.

Question 50

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

What are the incentives of AT?

Answer 50

Technological development, quantitative modelling, rapid growth of financial markets, globalisation.

Question 51

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

Why did AT became so popular?

Answer 51

The rise of ETFs and index funds, quantitative models in finance; need for push of lower costs of intermediation, arbitrage tracking, higher frequency of trading.

Question 52

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

Define and explain the crowding effect in hedge fund strategies that is likely to occur if multiple hedge funds open the same positions. What are its implications for financial stability in turbulent times?

Answer 52

Crowding is the phenomenon whereby several investment managers, knowingly or unknowingly, hold the same positions in their investment portfolios.
Forced liquidation of one or more large equity market-neutral portfolios, primarily to raise cash or reduce leverage, and the subsequent price impact of this massive and sudden unwinding → other similarly constructed portfolios experience losses other funds to deleverage their portfolios → additional price impact that leads to further losses, more deleveraging, and so on → the deadly feedback loop of coordinated forced liquidations leading to the deterioration of collateral value.

Question 53

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

What is the financial regulation 2.0?

Answer 53

The proposition of bringing current financial regulatory framework into the Digital Age by:
◦ Systems-Engineered: should approach financial markets as complex systems composed of multiple
software applications, hardware devices and human personnel
◦ Safeguards-Heavy: both human and machine safeguards are necessary to ensure the safe functioning
of the system
◦ Transparency-Rich: should aim to make the design of financial products more transparent and
accessible to regular automated audits
◦ Platform-Neutral: should be designed to encourage innovation in technology and finance and should be neutral with respect to the specifics of how core computing technologies work

Question 54

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

Due to such a rising interest in bitcoin, algorithmic trading on coin exchanges is also gaining popularity, which is undoubtedly bringing some benefits and dangers to the table. In the equity market, for example, some of the funds tried manipulating the market via “spoofing” and “layering”. What do these two strategies mean and what makes them different from the traditional “pump-and-dump” schemes?

Answer 54

“Spoofing” and “layering” are both forms of market manipulation whereby a trader uses visible non-bona fide orders to deceive other traders as to the true levels of supply or demand in the market.

This kind of manipulation does give false information for the markets about the levels of demand and supply, while pump-and-dump focuses on artificial creation of demand by encouraging other people to join the trade.

Question 55

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

Academic literature also documents market events in which hedge funds suffered record losses. Please provide an example of such an event from the paper. What does the unwind hypothesis imply about some of the hedge fund strategies?

Answer 55

The Unwind Hypothesis underscores the apparent commonality among quantitative equity market-neutral hedge funds and the importance of liquidity in determining market dynamics

Question 56

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

Drawing on any material, please describe the process of market making, including its risks and rewards. Please discuss how algorithmic trading can reduce profits of designated market makers.

Answer 56

Market making (MM) is when an intermediary participates in buying and selling securities to smooth out temporary imbalances in supply and demand because buyers and sellers do not always arrive at the same time. Market makers provide bid-ask quotes, and as price fluctuations and adverse selection make this a risky business, they require compensation, bid-ask spread.
◦ A typical market-making algorithm (AT) submits, modifies, and cancels limit orders to buy and sell a security with the objective of regularly capturing the bid-offer spread and liquidity rebates (payments made to participants who provide liquidity to the market), while also continuously managing risky inventory, keeping track of the demand-supply imbalance across multiple trading venues, and calculating the costs of doing business, including trading and access fees, margin requirements, and the cost of capital
Best connectivity to an exchange and best algorithm is what often determines success of MM

Question 57

Moore’s Law versus Murphy’s Law: Algorithmic Trading
and Its Discontents
Kirilenko, Andrei A. and Andrew W. Lo, 2013

How have the meaning of passive investing has changed?

Answer 57

It refers to trading on a well-defined and transparent algorithm, which could very well require active trading → decoupling of active trading and active investing; demand for algorithms that execute passive-active strategies.

Question 58

Please challenge the conclusions made by the authors! Recall at least three problems the
authors faced and that could affect their results/conclusions.