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!

The Case for an Edge-Driven Future for Supercomputing

September 24, 2021

“Exascale only becomes valuable when it’s creating and using data that we care about,” said Pete Beckman, co-director of the Northwestern-Argonne Institute of Science and Engineering (NAISE), at the most recent HPC Read more…

Three Universities Team for NSF-Funded ‘ACES’ Reconfigurable Supercomputer Prototype

September 23, 2021

As Moore’s law slows, HPC developers are increasingly looking for speed gains in specialized code and specialized hardware – but this specialization, in turn, can make testing and deploying code trickier than ever. Now, researchers from Texas A&M University, the University of Illinois at Urbana... Read more…

Qubit Stream: Monte Carlo Advance, Infosys Joins the Fray, D-Wave Meeting Plans, and More

September 23, 2021

It seems the stream of quantum computing reports never ceases. This week – IonQ and Goldman Sachs tackle Monte Carlo on quantum hardware, Cambridge Quantum pushes chemistry calculations forward, D-Wave prepares for its Read more…

Asetek Announces It Is Exiting HPC to Protect Future Profitability

September 22, 2021

Liquid cooling specialist Asetek, well-known in HPC circles for its direct-to-chip cooling technology that is inside some of the fastest supercomputers in the world, announced today that it is exiting the HPC space amid multiple supply chain issues related to the pandemic. Although pandemic supply chain... Read more…

TACC Supercomputer Delves Into Protein Interactions

September 22, 2021

Adenosine triphosphate (ATP) is a compound used to funnel energy from mitochondria to other parts of the cell, enabling energy-driven functions like muscle contractions. For ATP to flow, though, the interaction between the hexokinase-II (HKII) enzyme and the proteins found in a specific channel on the mitochondria’s outer membrane. Now, simulations conducted on supercomputers at the Texas Advanced Computing Center (TACC) have simulated... Read more…

AWS Solution Channel

Introducing AWS ParallelCluster 3

Running HPC workloads, like computational fluid dynamics (CFD), molecular dynamics, or weather forecasting typically involves a lot of moving parts. You need a hundreds or thousands of compute cores, a job scheduler for keeping them fed, a shared file system that’s tuned for throughput or IOPS (or both), loads of libraries, a fast network, and a head node to make sense of all this. Read more…

The Latest MLPerf Inference Results: Nvidia GPUs Hold Sway but Here Come CPUs and Intel

September 22, 2021

The latest round of MLPerf inference benchmark (v 1.1) results was released today and Nvidia again dominated, sweeping the top spots in the closed (apples-to-apples) datacenter and edge categories. Perhaps more interesti Read more…

The Case for an Edge-Driven Future for Supercomputing

September 24, 2021

“Exascale only becomes valuable when it’s creating and using data that we care about,” said Pete Beckman, co-director of the Northwestern-Argonne Institut Read more…

Three Universities Team for NSF-Funded ‘ACES’ Reconfigurable Supercomputer Prototype

September 23, 2021

As Moore’s law slows, HPC developers are increasingly looking for speed gains in specialized code and specialized hardware – but this specialization, in turn, can make testing and deploying code trickier than ever. Now, researchers from Texas A&M University, the University of Illinois at Urbana... Read more…

Qubit Stream: Monte Carlo Advance, Infosys Joins the Fray, D-Wave Meeting Plans, and More

September 23, 2021

It seems the stream of quantum computing reports never ceases. This week – IonQ and Goldman Sachs tackle Monte Carlo on quantum hardware, Cambridge Quantum pu Read more…

Asetek Announces It Is Exiting HPC to Protect Future Profitability

September 22, 2021

Liquid cooling specialist Asetek, well-known in HPC circles for its direct-to-chip cooling technology that is inside some of the fastest supercomputers in the world, announced today that it is exiting the HPC space amid multiple supply chain issues related to the pandemic. Although pandemic supply chain... Read more…

TACC Supercomputer Delves Into Protein Interactions

September 22, 2021

Adenosine triphosphate (ATP) is a compound used to funnel energy from mitochondria to other parts of the cell, enabling energy-driven functions like muscle contractions. For ATP to flow, though, the interaction between the hexokinase-II (HKII) enzyme and the proteins found in a specific channel on the mitochondria’s outer membrane. Now, simulations conducted on supercomputers at the Texas Advanced Computing Center (TACC) have simulated... Read more…

The Latest MLPerf Inference Results: Nvidia GPUs Hold Sway but Here Come CPUs and Intel

September 22, 2021

The latest round of MLPerf inference benchmark (v 1.1) results was released today and Nvidia again dominated, sweeping the top spots in the closed (apples-to-ap Read more…

Why HPC Storage Matters More Now Than Ever: Analyst Q&A

September 17, 2021

With soaring data volumes and insatiable computing driving nearly every facet of economic, social and scientific progress, data storage is seizing the spotlight. Hyperion Research analyst and noted storage expert Mark Nossokoff looks at key storage trends in the context of the evolving HPC (and AI) landscape... Read more…

GigaIO Gets $14.7M in Series B Funding to Expand Its Composable Fabric Technology to Customers

September 16, 2021

Just before the COVID-19 pandemic began in March 2020, GigaIO introduced its Universal Composable Fabric technology, which allows enterprises to bring together Read more…

Ahead of ‘Dojo,’ Tesla Reveals Its Massive Precursor Supercomputer

June 22, 2021

In spring 2019, Tesla made cryptic reference to a project called Dojo, a “super-powerful training computer” for video data processing. Then, in summer 2020, Tesla CEO Elon Musk tweeted: “Tesla is developing a [neural network] training computer called Dojo to process truly vast amounts of video data. It’s a beast! … A truly useful exaflop at de facto FP32.” Read more…

Enter Dojo: Tesla Reveals Design for Modular Supercomputer & D1 Chip

August 20, 2021

Two months ago, Tesla revealed a massive GPU cluster that it said was “roughly the number five supercomputer in the world,” and which was just a precursor to Tesla’s real supercomputing moonshot: the long-rumored, little-detailed Dojo system. “We’ve been scaling our neural network training compute dramatically over the last few years,” said Milan Kovac, Tesla’s director of autopilot engineering. Read more…

Esperanto, Silicon in Hand, Champions the Efficiency of Its 1,092-Core RISC-V Chip

August 27, 2021

Esperanto Technologies made waves last December when it announced ET-SoC-1, a new RISC-V-based chip aimed at machine learning that packed nearly 1,100 cores onto a package small enough to fit six times over on a single PCIe card. Now, Esperanto is back, silicon in-hand and taking aim... Read more…

CentOS Replacement Rocky Linux Is Now in GA and Under Independent Control

June 21, 2021

The Rocky Enterprise Software Foundation (RESF) is announcing the general availability of Rocky Linux, release 8.4, designed as a drop-in replacement for the soon-to-be discontinued CentOS. The GA release is launching six-and-a-half months after Red Hat deprecated its support for the widely popular, free CentOS server operating system. The Rocky Linux development effort... Read more…

Intel Completes LLVM Adoption; Will End Updates to Classic C/C++ Compilers in Future

August 10, 2021

Intel reported in a blog this week that its adoption of the open source LLVM architecture for Intel’s C/C++ compiler is complete. The transition is part of In Read more…

Hot Chips: Here Come the DPUs and IPUs from Arm, Nvidia and Intel

August 25, 2021

The emergence of data processing units (DPU) and infrastructure processing units (IPU) as potentially important pieces in cloud and datacenter architectures was Read more…

AMD-Xilinx Deal Gains UK, EU Approvals — China’s Decision Still Pending

July 1, 2021

AMD’s planned acquisition of FPGA maker Xilinx is now in the hands of Chinese regulators after needed antitrust approvals for the $35 billion deal were receiv Read more…

Google Launches TPU v4 AI Chips

May 20, 2021

Google CEO Sundar Pichai spoke for only one minute and 42 seconds about the company’s latest TPU v4 Tensor Processing Units during his keynote at the Google I Read more…

Leading Solution Providers

Contributors

HPE Wins $2B GreenLake HPC-as-a-Service Deal with NSA

September 1, 2021

In the heated, oft-contentious, government IT space, HPE has won a massive $2 billion contract to provide HPC and AI services to the United States’ National Security Agency (NSA). Following on the heels of the now-canceled $10 billion JEDI contract (reissued as JWCC) and a $10 billion... Read more…

10nm, 7nm, 5nm…. Should the Chip Nanometer Metric Be Replaced?

June 1, 2020

The biggest cool factor in server chips is the nanometer. AMD beating Intel to a CPU built on a 7nm process node* – with 5nm and 3nm on the way – has been i Read more…

Julia Update: Adoption Keeps Climbing; Is It a Python Challenger?

January 13, 2021

The rapid adoption of Julia, the open source, high level programing language with roots at MIT, shows no sign of slowing according to data from Julialang.org. I Read more…

Quantum Roundup: IBM, Rigetti, Phasecraft, Oxford QC, China, and More

July 13, 2021

IBM yesterday announced a proof for a quantum ML algorithm. A week ago, it unveiled a new topology for its quantum processors. Last Friday, the Technical Univer Read more…

Intel Launches 10nm ‘Ice Lake’ Datacenter CPU with Up to 40 Cores

April 6, 2021

The wait is over. Today Intel officially launched its 10nm datacenter CPU, the third-generation Intel Xeon Scalable processor, codenamed Ice Lake. With up to 40 Read more…

Frontier to Meet 20MW Exascale Power Target Set by DARPA in 2008

July 14, 2021

After more than a decade of planning, the United States’ first exascale computer, Frontier, is set to arrive at Oak Ridge National Laboratory (ORNL) later this year. Crossing this “1,000x” horizon required overcoming four major challenges: power demand, reliability, extreme parallelism and data movement. Read more…

Intel Unveils New Node Names; Sapphire Rapids Is Now an ‘Intel 7’ CPU

July 27, 2021

What's a preeminent chip company to do when its process node technology lags the competition by (roughly) one generation, but outmoded naming conventions make it seem like it's two nodes behind? For Intel, the response was to change how it refers to its nodes with the aim of better reflecting its positioning within the leadership semiconductor manufacturing space. Intel revealed its new node nomenclature, and... Read more…

Top500: Fugaku Still on Top; Perlmutter Debuts at #5

June 28, 2021

The 57th Top500, revealed today from the ISC 2021 digital event, showcases many of the same systems as the previous edition, with Fugaku holding its significant lead and only one new entrant in the top 10 cohort: the Perlmutter system at the DOE Lawrence Berkeley National Laboratory enters the list at number five with 65.69 Linpack petaflops. Perlmutter is the largest... Read more…

  • arrow
  • Click Here for More Headlines
  • arrow
HPCwire