No you are not in a normal distribution look at the equities markets (NO GAUSS NO POISSON)
No! every one using your pair trades do not harm your performances since your model is « when we buy it goes up »
Yes! your models are flawed, as they are more an inspiration of the St Petersburg paradox «bet further money against the odds ad infinitum »
No! the probability of adverse occurrence on bets which are outside normal distribution cannot be explained through normal distribution.
Yes! your models are skewed on the upside with a postulate « the convex reflexivity of markets » Yes! they fail to read inflexion points.
No you cannot factor all the variables in your models even a liquidity crunch was not a base case scenario.

All the models which were fed in 1987 under the same trivial assumptions have proved to be a failure.

OK, you asked for it. I normally strive to be polite, but I cannot believe someone who claims to have a statistical background is defending the widespread “one in every 10,000 year” BS.

LTCM had a similar meltdown and massive selling a mere 10 years ago. What happened last week is not an out of bounds event. Anyone who know financial history knows that markets are subject to mania, meltdowns, and panic. Models that don’t allow for that are bunk.

In addition, the data used in most of the models is specious. It assumes historical consistency when changes in markets (transaction costs, trading volumes relative to the value of underlying assets, increasing use of derivatives, particularly indices, and imperfect relationships between derivative and cash prices) make the comparability of data over time questionable. Even if you have a 20 year data series, the data of 20 years ago has little relevance for markets today.

Go read Mandelbrot and then maybe we can have a real discussion.

I really wish the media/bloggers would take the time to understand the industry and the dynamics of the situation before making knee-jerk , misguided comments.

Touche.

Wall Street is painfully finding out that some maxims never go away, no matter how many models, math equations, and money you throw at them…

http://www.ft.com/cms/s/8eebf016-48fd-11dc-b326-0000779fd2ac.html

there is also a mini crisis in commercial paper.

Ufff, it sure going to be a scary week.

Here

http://www.ft.com/cms/s/030ba626-48f9-11dc-b326-0000779fd2ac.html

The FT reports that the average quant hedge fund is down 15%.

They are on average leveraged 4x.

Oh boy! This calls for a vicious cycle of margin calls and forced selling to meet them which further deterioration of assets to further margin calls…

It’s a bloodbath and the markets should be a pinball machine these week.