Quant Bust 2020
World Economics 21(2) (2020) 183-217
29 Pages Posted: 7 Apr 2020 Last revised: 24 Jul 2020
Date Written: April 7, 2020
We explain in a nontechnical fashion why dollar-neutral quant trading strategies, such as equities Statistical Arbitrage, suffered substantial losses (drawdowns) during the COVID-19 market selloff. We discuss: (i) why these strategies work during "normal" times; (ii) the market regimes when they work best; and (iii) their limitations and the reasons for why they "break" during extreme market events. An accompanying appendix (with a link to freely accessible source code) includes backtests for various strategies, which put flesh on and illustrate the discussion in the main text.
Keywords: COVID-19, coronavirus, quant, quantitative, trading, strategy, statistical arbitrage, dollar-neutral, drawdown, loss, market, selloff, backtest, source code, optimization, regression, portfolio, risk, alpha, return, mean-reversion, momentum, machine learning, artificial intelligence, data mining
JEL Classification: G00, G01, G10, G11, G12, G14, G20, G23
Suggested Citation: Suggested Citation