Authors: Stefan Yu and Daniel Schmitt, PhD Time and time again market commentators write of narrowing equity markets as in recent history a small number of stocks contribute more than 100% to the index performance (“Equities: And then there were nine” – Jan 2016, “5 companies are carrying the S&P500” – May 2017, “These 10…
Scientific foundation - examples
What do a high-pressure tank on a rocket, a seismic fault, and a busy market have in common? The research carried out by the group of Prof. Didier Sornette shows they can all be described in very similar basic physical terms, i.e., as self-organizing systems that develop similar patterns over many scales, from the very small to the very large. And all three have the potential for extreme behavior: rupture, quake, or crash.
The same mathematical framework (“finite-time singularities”), provides a very powerful language and description of these phenomena. Prof. Didier Sornette and his group have become leading experts on this mathematical framework, which provides a unifying language for systems undergoing changes of regimes, transitions, transformations, revolutions, crises, ruptures, etc.
The over-arching philosophy of the theory powering SIMAG® methods is the recognition that the world, and especially social structures and financial markets, are organized as complex hierarchical systems. Multiple scales interact and influence each other, leading to recognizable finite-time singular behaviors associated with pockets of predictability.
Rocket science, literally!
The damage and fracture of materials are technologically of major interest because of their economic and human costs. They cover a wide range of phenomena such as the cracking of glass, the aging of concrete, the failure of fiber networks, and the breaking of a metal bar subject to an external load.
Failures of composite systems are of utmost importance in the naval, aeronautics, and space industries. The method invented by Prof. Didier Sornette to predict the failure of pressure tanks strapped on to the Ariane rocket and on to satellites is now used as a routine industrial monitoring procedure.
The key concept of this invention is to quantify the collective behavior of the acoustic emissions that reveal the level of degradation and the potential for a systemic failure. Mathematically, the method uses concepts from the “renormalization group theory” of critical phenomena, for which a Nobel prize in physics was awarded to Kenneth Wilson in 1982.
Artist’s concept of the Ariane 6 rocket in its “Ariane 64” configuration with four solid rocket boosters. Credit: CNES
Social systems, and in particular financial markets, are organized and structured by the interplay of fluxes of exogenous information, perturbations and shocks on the one hand, and by endogenous interactions that react to external solicitations on the other hand.
Book sales, YouTube video views, movie attendance, social media hypes etc., are illustrative examples in which the ETH Zurich group associated with SIMAG® have demonstrated the existence of a small number of universality classes in the response function to shocks, news and disruptions.
Concretely this can be used to distinguish endogenous from exogenous anomalies. This enables the quantification of the response of the system and its predictability and, by extension, the operational implementation of optimal strategies.
Log Periodic Power Law Singularity - how we work
The research of Prof. Didier Sornette has shown that most bubbles, crashes and regime shifts are endogenous, i.e. have an internal cause or origin
Proprietary work identifies complex “fingerprints” of regime shifts that have log periodic power law singular form (LPPLS)
Parameter ranges, statistical confidence metrics, and dynamical patterns diagnose the status of the overall process, the system (in)stability and the level of risk
Metrics deliver robust indicators of longer term market regime (risk on, risk off). Robust metrics obtained at the cost of intensive computational investment
Resulting analytics identify the degree of system (in-)stability – a highly non-stationary indicator providing probabilistic information on the attractiveness of owning any given stock, sector, or country at any given time
Price data of individual equities are analyzed using long-term and short-term filters of LPPLS analytics. Analytics achieve a robust fit to the LPPLS model with a full set of parameters and statistics to determine:
- Long-term regime status
- Short-term phase of investment cycle
- Level of system instability across countries, sectors, individual stocks
Capturing two fundamental characteristics:
- Pervasive self-reinforcing dynamics (positive feedbacks – i.e., super-exponential price growth) leading to regime shifts
- Alternative spells of fear/mini-panics during bubble regimes described by accelerated volatility dynamics (accelerating oscillations)
Professor Didier Sornette
- Chair of Entrepreneurial Risk at ETH Zurich since 2006
- 25+ years of research on instability and nonlinear feedback in physical and other complex, dynamic systems
- Father of the proprietary model of SIMAG and founding shareholder. Member of the BoD of SIMAG and consultant to the company
Next-generation behavioral finance
Present generation behavioral finance/economics focuses mainly on the biases of decision making in single individuals, such as over-confidence, conjunction fallacy (assumption that specific conditions are more probable than a single general one), disjunction effect (breaking of the sure thing principle), the Allais paradox (inconsistency of actual observed choices with the predictions of expected utility theory), and the Ellsberg paradox (people overwhelmingly prefer taking on risk in situations where they know specific odds rather than an alternative risk scenario in which the odds are ambiguous), etc.
Our approach is “next-generation behavior finance” in the sense that it identifies and uses the biases and structures resulting from the collective behavior of interacting humans. This leads to phenomena such as “the wisdom of crowds” as well as “the madness of crowds”. As concerns marketable securities, and since financial markets are the result of the aggregation of many individual decisions, it is the next-generation behavioral finance focusing on collective dynamics that is relevant.
General types of agents interacting and competing in financial markets inherently results in:
- positive feedback
- faster than exponential price dynamics (ultimately unsustainable)
- identifiable phases of instability
- Extensive research indicates that the nature of price patterns reflects inherently the nature of humans who collectively trade assets with uncertain value
- Agent-based models with generic rules produce the same structures and can be used for reverse-engineer financial markets. They also provide a framework for testing hypotheses and feasibility
- The engines of SIMAG® build on the rational integration of our understanding how interacting and competing agents with feedback dynamics interpret and act on uncertainty information
In a nutshell...
…the methods developed by SIMAG® aim at deciphering these hierarchies and using them for the detection of pockets of predictability resulting from cascades of information in the social and financial networks. The fundamental nature of the nonlinear positive feedback dynamic is resilient to classic mispricing compression. Therefore it is a highly scalable and a durable dynamic to be exploited, although signal strength and impact varies significantly through time
SIMAG® is dedicated to a continuous knowledge transfer from frontier research in academia to first-class operational implementations in its portfolios. It is closely associated with Prof. Didier Sornette’s globally-sourced research group at ETH Zurich. SIMAG® thus benefits first-hand from advanced and innovative research originating from the renowned, cosmopolitan Swiss Federal Institute of Technology.
In other words, SIMAG® is not just a one-off exploitation of a foundational discovery. It benefits from a continuous process of drawing from fundamental research and proprietary research and development, which sustainably enriches portfolio construction and implementation.
The Board of Directors of Systematic Investment Management AG (SIMAG) announces that Dr. Christian Gast will join the company as CEO with effect from November 2018. As CEO, Dr. Christian Gast will lead the newly founded company SIMAG and develop the firm to become a leading asset manager of systematic investment strategies in the Swiss…
Prestigious magazine Risk.net features SIMAG’s unique nvestment approach, the head of Portfolio Management Dietmar Peetz, PhD and SIMAG’s Director Professor Didier Sornette, the influentual researcher and father of SIMAG’s systematic approach. More on Risk.net, the world’s leading source of in-depth news and analysis on risk management, derivatives and regulation. Article as PDF: Start-up fund looks to profit from early-stage…
Didier Sornette will be Keynote Speaker at the FuW Indexing Forum 2018 with his thoughts on “Indexed into the Financial Bubble or Bubbled into the Financial Index?”. https://www.fuw-forum.ch/indexing-forum-2018/
We’re proud to be featured in this months’ issue of the Emerging Market Monitor of Opalesque, the premium professional news service to participants in the alternative investment sector. OpalesqueNewManagers70-February-2018
The scientific study of complex systems has transformed a wide range of disciplines in recent years, enabling researchers in both the natural and social sciences to model and predict phenomena as diverse as earthquakes, global warming, demographic patterns, financial crises, and the failure of materials. In this book, Didier Sornette boldly applies his varied experience…
Stock markets around the world are falling but SIMAG’s consultant and member of the BoD Professor Didier Sornette is holding his nerve. The ETH Zurich Professor and Director of the Financial Crisis Observatory tells Amanda Kayne that he is happy to see asset prices coming down to a more normal level. He began receiving strong…
Credit Suisse Asset Management and an ETH Zurich spin-off company to establish Systematic Investment Management AG
Media Release Zurich, January 18, 2018 Credit Suisse Asset Management Switzerland and the founders of a Swiss Federal Institute of Technology (ETH Zurich) spin-off company have today announced the formation of the joint venture Systematic Investment Management AG (SIMAG). SIMAG will provide proprietary quantitative investment solutions to institutional investors using the latest scientific research from…