Market Tremors / Progress in Mathematics (PDF)

When certain agents in the financial network behave differently or in larger scale than they have in the past, traditional portfolio theory breaks down. It can no longer account for toxic feedback effects within the network. Our feedback-based risk adjustments allow investors to size their positions sensibly in dangerous set ups, where volatility is not providing an accurate barometer of true risk.

The authors have drawn from the fields of statistical physics and game theory to simplify and quantify the impact of very large agents on the distribution of forward returns, and to offer techniques for dealing with situations where markets are structurally risky yet realized volatility is low. The concepts discussed here should be of practical interest to portfolio managers, asset allocators, and risk professionals, as well as of academic interest to scholars and theorists.

Hari P. Krishnan is head of volatility strategies at SCT Capital in New York. He was formerly a portfolio manager at Doherty Advisors in New York, a fund manager at CrossBorder Capital in London, an executive director at Morgan Stanley focused on asset allocation, and an options trading strategist for a market-making firm at the CBOE. He was a research scientist at the Columbia Earth Institute after receiving a PhD in applied math from Brown University and a BA in math from Columbia University.

Ash Bennington is Senior Editor & Crypto Editor at Real Vision, where he covers finance, investing, and economics, with a particular focus on blockchain and digital assets. Prior to joining Real Vision, he ran CoinDesk's market coverage. Ash is a former CNBC reporter, and served as Editor-in-Chief of Nouriel Roubini's Macro Economics Blog 'Roubini EconoMonitor with Ash Bennington'. His work has appeared in Business Insider, The Christian Science Monitor, ZeroHedge, The Observer, and Yahoo Finance.