The Dow Jones Industrial Average dropped 508 points on October 19, 1987 which accounted for 22.6% of its value. Unlike others Fischer was excited on this day because it was history in the making. It gave him an opportunity to study and explain why the crash happened. Some people felt that the government needed to step in to help control the stock market so that there would not be this huge decrease again but Fischer felt that increasing government regulation would not help the market but would cause more problems by making it less liquid.
This section shows that Fischer was unconcerned about how much money or value was lost and was more concerned about explaining why it happened.
Fischer and Rob Jones worked at Goldman Sachs to develop a portfolio insurance, something that a firm by the name Leland, O'Brien, Rubinstein had developed to ensure that portfolios would not fall below a certain level. Fischer developed the constant proportion portfolio insurance which in his words was easier and better to use then the LOR.
Although Fischers constant proportion portfolio insurance was not implemented in time before the crash he was able to understand what factors influenced the crash. He concluded that the crash was a result of noise.
A for Hoyt.
ReplyDeleteNot so much that the crash was caused by noise, but by (automated) trading that was linked to noise.
And yes ... that's the Rubinstein from the binomial pricing formula.