Traders, Guns and Money, 3rd Edition by Satyajit Das
Author:Satyajit Das [Satyajit Das]
Language: eng
Format: epub
Publisher: Pearson Education
Published: 2020-07-17T00:00:00+00:00
ENDGAME
The banks worked with the LTCM principals to gradually liquidate the portfolio over about a year and were paid back ahead of schedule. Subsequently, John Meriwether established a new hedge fund (JWM Associates), although not many of the original principals followed him to his new venture. Scholes set up a separate hedge fund with some of the LTCM gang.
After the fall, the principals grizzled about the cynical way that the dealers had used conditions to rip LTCM apart â it was sour grapes. In financial markets, anybody in distress is bratwurst in waiting. LTCM would have done the same thing given a chance.
Merton and Scholes wandered the lecture circuit. LTCMâs trades were defensible, they made sense â âequilibriumâ would prevail in the long run. âDo people really understand what a stock market volatility of 35% means?â âCredit spreads were well beyond the level needed to cover the highest credit losses ever encountered in known history!â The models were fine, the world was wrong. Scholes promoted a new product â liquidity options. They would hedge against the liquidity risk that had scuppered LTCM.
LTCMâs experience with mathematical finance and risk modelling did not discourage others; its models had just been faulty, not advanced enough. They would build better, more sophisticated models. John Maynard Keynes observed that âthe market can remain irrational longer than you can remain solventâ.
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