Quantitative Investing and Market Instability

46 Pages Posted: 9 Nov 2018 Last revised: 16 Feb 2021

See all articles by William Beggs

William Beggs

University of San Diego School of Business

Jonathan Brogaard

University of Utah - David Eccles School of Business

Austin Hill-Kleespie

University of Utah, David Eccles School of Business, Department of Finance; G. Brint Ryan College of Business, University of North Texas

Date Written: February 15, 2021

Abstract

The May 2010 Flash Crash and August 2007 Quant Meltdown raised concerns about the impact of quantitative investment strategies on market instability. We examine whether quantitative investing dampens or exacerbates market instability by focusing on mutual fund fire sales. We find that quantitative fund fire sales have a much larger impact on market instability than fire sales by traditional mutual funds. For the same magnitude fire sale, quantitative funds’ impact is over eight times as large. The larger impact is due to quantitative funds’ reliance on similar trading strategies and their strategies’ sensitivity to the time-series of returns.

Keywords: Investment management, security selection, quantitative funds, mutual funds, fire sales, herding, market stability

JEL Classification: G11, G23, G40

Suggested Citation

Beggs, William and Brogaard, Jonathan and Hill-Kleespie, Austin, Quantitative Investing and Market Instability (February 15, 2021). Available at SSRN: https://ssrn.com/abstract=3281447 or http://dx.doi.org/10.2139/ssrn.3281447

William Beggs

University of San Diego School of Business ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

Jonathan Brogaard (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Austin Hill-Kleespie

University of Utah, David Eccles School of Business, Department of Finance ( email )

Salt Lake City, UT
United States

G. Brint Ryan College of Business, University of North Texas

Denton, TX 76203
United States

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