NYAIR Episode 52 –The Epidemiology of Volatility

ByBritt Tunick

A discussion with Richard Roche, a managing director at Little Harbor Advisors, and Steven Lerit, a portfolio manager and the head of risk management for Washington Crossing Advisors about volatility and the multiple factors that play in to it.

There are common pathways in the transmission of viruses and volatility. Volatility, like infectious disease, is transmitted through common sources of infection. Sources of volatility transmission include investor psychology, market contagion and liquidity pressures. The science of epidemiology, the Kermack-McKendrick SIR Model (1927) and “Reproduction Ratio” are useful mechanisms to examine market contagion and volatility spikes – both UP and down.

Most quantitative risk models fail to detect regime changes. Because quant alpha and risk models rely heavily on historical data, off-the-shelf risk models are unable to rapidly respond to exogenous epochs like the novel Coronavirus (SARS-CoV-2). Most quant models cannot handle unusual events or process rapid regime changes as they rely heavily on historical data.

Following are some of the topics covered in this podcast:

  • Viral/Volatility Epidemiological Model (Kermack-McKendrick SIR)
  • Virus & VOL Super-Spreaders
  • Common Vectors of Transmission
  • Why Most Quant Risk Models Fail to Detect Regime Change
  • Fat-tail, Multi-asset Class & Turbulence-enhanced Risk Models
  • How to Identify/Highlight Unknown Risk Exposures

Rick Roche, CAIA, is a managing director at Little Harbor Advisors, which is a sponsor of quantitative investment strategies. He is also the founder of Roche Invest AI, a consultancy specializing in research, integration and promotion of AI, Machine Learning and utilization of alternative investment data in the investment management industry. Roche Invest AI advises on the diffusion and propagation of quantitative investment strategies powered by machine learning, Big Data and Natural Language Processing. From 1977 to 1980, he served two terms in the Massachusetts House of Representatives representing Springfield, MA.

Steven Lerit, is a client portfolio manager for Washington Crossing Advisors, where he focuses on equity, fixed income, and multi-asset portfolios with private client, high net worth, and institutional investors. He is also the head of risk management with a particular focus on proprietary multifactor models, portfolio construction, data analytics and machine learning. Prior to joining Washington Crossing Advisors he was an investment consultant and before that head of quantitative risk at UBS Financial Services, among others. He is a longstanding member of the Education Committee of the Global Association of Risk Professionals, which awards the Financial Risk Manager (FRM) designation; a member of the Performance & Risk Analytics Group at CFA Society NY and a former director of the society and an advisory board member, contributor and top reviewer for The Journal of Performance Measurement.