The Quantitative Models Tanked Too

By Michael Feldman

September 23, 2008

The confluence of the U.S. financial meltdown and this week’s High Performance on Wall Street conference in New York might be one of those coincidences that’s trying to tell us something. To be honest, I’m not a big believer in cosmic happenstance, but in this case it made me wonder if the financial software models had anything to do with our current economic chaos. I didn’t have to look very hard to find some correlation.

A great post by Saul Hansell at the New York Times explained why many of the risk models developed by quants didn’t see the brick wall at the end of the tunnel (see How Wall Street Lied to Its Computers). According to Hansell, there were multiple points of failure at these firms, but in many cases the quantitative models themselves hid the risks they were supposed to be revealing. Writes Hansell:

Ultimately, the people who ran the firms must take responsibility, but it wasn’t quite that simple. In fact, most Wall Street computer models radically underestimated the risk of the complex mortgage securities, they said. That is partly because the level of financial distress is “the equivalent of the 100-year flood,” in the words of Leslie Rahl, the president of Capital Market Risk Advisors, a consulting firm. But she and others say there is more to it: The people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to feed them oversimplified data. This kept them from sounding the alarm early enough.

That sentiment reflects a recent conversation I had with Jerry Hanweck, of Hanweck Associates, a firm that develops quantitative finance products. He told me some of the high profile hedge funds that lost a lot of money last year were also relying on limited historical data to drive their models. Especially in high frequency trading and arbitrage trading situations, Hanweck thinks the traders often misapply their statistics. According to him, when you gather all this random data together and run regression analysis on it, some of the results are going to look reasonable, just by chance. “If you try to extract too much from the limited amount of data that we have available to us, you really can overfit the data,” he explains.

In some cases though, the inverse problem occurred. Hansell writes that some models were designed to dilute the risk by looking too far back — into the last several years of trading history versus just the last several months — when things were starting to get dicey. This hid short-term volatility behind a mask of long-term stability. But to keep profits flowing, Wall Street execs had a vested interest (literally) to keep these less-than-stellar models humming along.

Many economists think that the 2007 credit crunch that launched the current downward financial spiral was set in motion by the now notorious collateralized debt obligations or CDOs. These instruments had become infested with devalued subprime loans, and at some point it became clear to investors that the risk associated with CDOs was a lot larger than originally thought.

According to Hanweck, because of the complexity of CDOs, the risk of these instruments is based on simplified assumptions. In some cases, limits in computational power made these simplifications necessary so that the valuation models could be run. “That’s what really started the problems last year and even back in 2005, when GM and Ford had their first batch of hiccups,” he says. The nature of these CDOs suggests that the buyers — investment banks, commercial banks, insurance companies, and other institutions — were engaging in faith-based capitalism.

And what about the subprime mortgages that started it all? Well, devising and selling these packages didn’t have much to do with computers or quantitative models. Says Hanweck: “That was just plain old greed.”

Subscribe to HPCwire's Weekly Update!

Be the most informed person in the room! Stay ahead of the tech trends with industy updates delivered to you every week!

University of Stuttgart Inaugurates ‘Hawk’ Supercomputer

February 20, 2020

This week, the new “Hawk” supercomputer was inaugurated in a ceremony at the High-Performance Computing Center of the University of Stuttgart (HLRS). Officials, scientists and other stakeholders celebrated the new sy Read more…

By Staff report

US to Triple Its Supercomputing Capacity for Weather and Climate with Two New Crays

February 20, 2020

The blizzard of news around the race for weather and climate supercomputing leadership continues. Just three days after the UK announced a £1.2 billion plan to build the world’s largest weather and climate supercomputer, the U.S. National Oceanic and Atmospheric Administration... Read more…

By Oliver Peckham

Indiana University Researchers Use Supercomputing to Model the State’s Largest Watershed

February 20, 2020

With water stressors on the rise, understanding and protecting water supplies is more important than ever. Now, a team of researchers from Indiana University has created a new climate change data portal to help Indianans Read more…

By Staff report

TACC – Supporting Portable, Reproducible, Computational Science with Containers

February 20, 2020

Researchers who use supercomputers for science typically don't limit themselves to one system. They move their projects to whatever resources are available, often using many different systems simultaneously, in their lab Read more…

By Aaron Dubrow

China Researchers Set Distance Record in Quantum Memory Entanglement

February 20, 2020

Efforts to develop the necessary capabilities for building a practical ‘quantum-based’ internet have been ongoing for years. One of the biggest challenges is being able to maintain and manage entanglement of remote q Read more…

By John Russell

AWS Solution Channel

Challenging the barriers to High Performance Computing in the Cloud

Cloud computing helps democratize High Performance Computing by placing powerful computational capabilities in the hands of more researchers, engineers, and organizations who may lack access to sufficient on-premises infrastructure. Read more…

IBM Accelerated Insights

Intelligent HPC – Keeping Hard Work at Bay(es)

Since the dawn of time, humans have looked for ways to make their lives easier. Over the centuries human ingenuity has given us inventions such as the wheel and simple machines – which help greatly with tasks that would otherwise be extremely laborious. Read more…

New Algorithm Allows PCs to Challenge HPC in Weather Forecasting

February 19, 2020

Accurate weather forecasting has, by and large, been situated squarely in the domain of high-performance computing – just this week, the UK announced a nearly $1.6 billion investment in the world’s largest supercompu Read more…

By Oliver Peckham

US to Triple Its Supercomputing Capacity for Weather and Climate with Two New Crays

February 20, 2020

The blizzard of news around the race for weather and climate supercomputing leadership continues. Just three days after the UK announced a £1.2 billion plan to build the world’s largest weather and climate supercomputer, the U.S. National Oceanic and Atmospheric Administration... Read more…

By Oliver Peckham

Japan’s AIST Benchmarks Intel Optane; Cites Benefit for HPC and AI

February 19, 2020

Last April Intel released its Optane Data Center Persistent Memory Module (DCPMM) – byte addressable nonvolatile memory – to increase main memory capacity a Read more…

By John Russell

UK Announces £1.2 Billion Weather and Climate Supercomputer

February 19, 2020

While the planet is heating up, so is the race for global leadership in weather and climate computing. In a bombshell announcement, the UK government revealed p Read more…

By Oliver Peckham

The Massive GPU Cloudburst Experiment Plays a Smaller, More Productive Encore

February 13, 2020

In November, researchers at the San Diego Supercomputer Center (SDSC) and the IceCube Particle Astrophysics Center (WIPAC) set out to break the internet – or Read more…

By Oliver Peckham

Eni to Retake Industry HPC Crown with Launch of HPC5

February 12, 2020

With the launch of its Dell-built HPC5 system, Italian energy company Eni regains its position atop the industrial supercomputing leaderboard. At 52-petaflops p Read more…

By Tiffany Trader

Trump Budget Proposal Again Slashes Science Spending

February 11, 2020

President Donald Trump’s FY2021 U.S. Budget, submitted to Congress this week, again slashes science spending. It’s a $4.8 trillion statement of priorities, Read more…

By John Russell

Policy: Republicans Eye Bigger Science Budgets; NSF Celebrates 70th, Names Idea Machine Winners

February 5, 2020

It’s a busy week for science policy. Yesterday, the National Science Foundation announced winners of its 2026 Idea Machine contest seeking directions for futu Read more…

By John Russell

Fujitsu A64FX Supercomputer to Be Deployed at Nagoya University This Summer

February 3, 2020

Japanese tech giant Fujitsu announced today that it will supply Nagoya University Information Technology Center with the first commercial supercomputer powered Read more…

By Tiffany Trader

Julia Programming’s Dramatic Rise in HPC and Elsewhere

January 14, 2020

Back in 2012 a paper by four computer scientists including Alan Edelman of MIT introduced Julia, A Fast Dynamic Language for Technical Computing. At the time, t Read more…

By John Russell

Cray, Fujitsu Both Bringing Fujitsu A64FX-based Supercomputers to Market in 2020

November 12, 2019

The number of top-tier HPC systems makers has shrunk due to a steady march of M&A activity, but there is increased diversity and choice of processing compon Read more…

By Tiffany Trader

SC19: IBM Changes Its HPC-AI Game Plan

November 25, 2019

It’s probably fair to say IBM is known for big bets. Summit supercomputer – a big win. Red Hat acquisition – looking like a big win. OpenPOWER and Power processors – jury’s out? At SC19, long-time IBMer Dave Turek sketched out a different kind of bet for Big Blue – a small ball strategy, if you’ll forgive the baseball analogy... Read more…

By John Russell

Intel Debuts New GPU – Ponte Vecchio – and Outlines Aspirations for oneAPI

November 17, 2019

Intel today revealed a few more details about its forthcoming Xe line of GPUs – the top SKU is named Ponte Vecchio and will be used in Aurora, the first plann Read more…

By John Russell

IBM Unveils Latest Achievements in AI Hardware

December 13, 2019

“The increased capabilities of contemporary AI models provide unprecedented recognition accuracy, but often at the expense of larger computational and energet Read more…

By Oliver Peckham

SC19: Welcome to Denver

November 17, 2019

A significant swath of the HPC community has come to Denver for SC19, which began today (Sunday) with a rich technical program. As is customary, the ribbon cutt Read more…

By Tiffany Trader

Fujitsu A64FX Supercomputer to Be Deployed at Nagoya University This Summer

February 3, 2020

Japanese tech giant Fujitsu announced today that it will supply Nagoya University Information Technology Center with the first commercial supercomputer powered Read more…

By Tiffany Trader

51,000 Cloud GPUs Converge to Power Neutrino Discovery at the South Pole

November 22, 2019

At the dead center of the South Pole, thousands of sensors spanning a cubic kilometer are buried thousands of meters beneath the ice. The sensors are part of Ic Read more…

By Oliver Peckham

Leading Solution Providers

SC 2019 Virtual Booth Video Tour

AMD
AMD
ASROCK RACK
ASROCK RACK
AWS
AWS
CEJN
CJEN
CRAY
CRAY
DDN
DDN
DELL EMC
DELL EMC
IBM
IBM
MELLANOX
MELLANOX
ONE STOP SYSTEMS
ONE STOP SYSTEMS
PANASAS
PANASAS
SIX NINES IT
SIX NINES IT
VERNE GLOBAL
VERNE GLOBAL
WEKAIO
WEKAIO

Jensen Huang’s SC19 – Fast Cars, a Strong Arm, and Aiming for the Cloud(s)

November 20, 2019

We’ve come to expect Nvidia CEO Jensen Huang’s annual SC keynote to contain stunning graphics and lively bravado (with plenty of examples) in support of GPU Read more…

By John Russell

Top500: US Maintains Performance Lead; Arm Tops Green500

November 18, 2019

The 54th Top500, revealed today at SC19, is a familiar list: the U.S. Summit (ORNL) and Sierra (LLNL) machines, offering 148.6 and 94.6 petaflops respectively, Read more…

By Tiffany Trader

Azure Cloud First with AMD Epyc Rome Processors

November 6, 2019

At Ignite 2019 this week, Microsoft's Azure cloud team and AMD announced an expansion of their partnership that began in 2017 when Azure debuted Epyc-backed instances for storage workloads. The fourth-generation Azure D-series and E-series virtual machines previewed at the Rome launch in August are now generally available. Read more…

By Tiffany Trader

Intel’s New Hyderabad Design Center Targets Exascale Era Technologies

December 3, 2019

Intel's Raja Koduri was in India this week to help launch a new 300,000 square foot design and engineering center in Hyderabad, which will focus on advanced com Read more…

By Tiffany Trader

In Memoriam: Steve Tuecke, Globus Co-founder

November 4, 2019

HPCwire is deeply saddened to report that Steve Tuecke, longtime scientist at Argonne National Lab and University of Chicago, has passed away at age 52. Tuecke Read more…

By Tiffany Trader

IBM Debuts IC922 Power Server for AI Inferencing and Data Management

January 28, 2020

IBM today launched a Power9-based inference server – the IC922 – that features up to six Nvidia T4 GPUs, PCIe Gen 4 and OpenCAPI connectivity, and can accom Read more…

By John Russell

D-Wave’s Path to 5000 Qubits; Google’s Quantum Supremacy Claim

September 24, 2019

On the heels of IBM’s quantum news last week come two more quantum items. D-Wave Systems today announced the name of its forthcoming 5000-qubit system, Advantage (yes the name choice isn’t serendipity), at its user conference being held this week in Newport, RI. Read more…

By John Russell

Cray Debuts ClusterStor E1000 Finishing Remake of Portfolio for ‘Exascale Era’

October 30, 2019

Cray, now owned by HPE, today introduced the ClusterStor E1000 storage platform, which leverages Cray software and mixes hard disk drives (HDD) and flash memory Read more…

By John Russell

  • arrow
  • Click Here for More Headlines
  • arrow
Do NOT follow this link or you will be banned from the site!
Share This