This post is a review on A Demon Of Our Own Design: Markets, Hedge Funds, And The Perils Of Financial Innovation' by Richard Bookstaber. Website: http://rick.bookstaber.com/
I have bought this book during the recent subprime Credit Debt Obligations (CDOs) meltdown, so as to better understand how the subprime leads to market meltdown. Essentially, from what I understand from the book, the recent market meltdown is due to liquidity crunch, wherely hedge funds simultatneously sold their equities position and the market is not able to absorb. This transpire to lower prices for the equities and with the momentum traders further shorting action to pre-empt and in the process profiting from the selldown, the market meltdown was exacerberated.
Other interesting points from the book are:
1) Correlation of different assets is likely to converge to 1 during liquidity crunch.
2) There are liquidity demanders and liquidity providers in the market. Interestingly, value investors tend to be liquidity providers, while technical traders tend to be liquidity demanders.
3) A cockroach with its simple strategy of fleeing when uncertain is able to survive in different environments. However,the fugu fish which has evolve to many different fishes with different kinds of survival techniques become extinct when a new type of fish (predator) was introduced to their environment.
... The book contains other points besides the above.
Overall, the book is quite a good read, especially for those who have studied economics. Or if you have enjoyed books like 'Fooled like Randomness', you would enjoy this book too.
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