jean-philippe bouchaud

ML Score
Capital Fund Management | Chairman and Head of research
How much of the recent market rally is explained by (trend following) quant funds? A recent FT article suggests their contribution is substantial, seehttps://lnkd.in/ef4ah4xy The order-driven theory of price moves, aka the Inelastic Market Hypothesis (IMH), provides a ballpark estimate. Money flowing into the US stock market from quant funds since June is estimated in the FT paper to be around $100bn. This must be compared to a total market cap. of $50tn. From the work of Gabaix & Koijen (GK) [1] and mine [2] the mechanical impact of these $100bn should be a $500bn increase of total market cap., i.e., 1% -- to be compared to an actual increase of around 14% ($7tn) since mid June.  From my interpretation of GK’s multiplier of 5, one should however account for significant transient impact effects: the impact of flows is quite a bit larger on the short run (days/weeks) before decaying to the medium-term multiplier value of 5. A reasonable estimate is that over 2 months, a constant inflow of money adding up to $100bn could have impacted prices by 2-3% max, i.e., only a fifth of the observed 14% rally. So, my conclusion is that whereas quant funds did contribute, but other deep pockets must have been pouring in money as well (after all, many investors unwittingly act as trend followers as well – such a behaviour is so entrenched in human psyche that it is hard to avoid it). Two final remarks: ·      If the inflow of quant funds (and only quant funds) were to continue at the same pace in the next two months, market prices should add another 2-3%. If on the other hand flows were to come to a halt, relaxation of market impact would bring prices down by 1-2%.·      The *typical* volatility of the market is 20% annual, i.e., 8% in 2 months. A 14% “rally” is not even a 2-sigma event. So, one should perhaps refrain from over-interpreting puny 1-2% effects. Even calling 14% a rall