Research backs up the idea that investor redemptions create systematic bursts and strange correlations. But that means perceived diversification benefits fail when most needed, according to Rama Cont, a University of Oxford professor whose paper, first published in 2012, examines the phenomenon.
“It’s exactly the same thing that happened in the quant crash in 2007,” Cont said. “Investors are not passive -- their typical reaction is to deleverage in a big loss. That reaction has to be included into models, otherwise you don’t see the concentration risk.”
This article was provided by Bloomberg News.