Random Matrix Theory and Its Application to Covariance Matrices

Hari Krishnan is joined today by Co-Founder & Chairman of Capital Fund Management (CFM) Jean-Philippe Bouchaud, to discuss how news drive price action, and some of the science behind the large price movements, how we should think about adapting to changing dynamics such as correlations, Jean-Philippe’s background in physics and journey into finance, the effectiveness of the Bloomberg terminal, using dimensional analysis for research purposes, the inelastic market hypothesis, differentiating yourself as a Trend Follower, and the connection between volatility strategies and high frequency data.

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In this episode, we discuss:

• The extent to which news drives price action
• How to look at ever-changing market dynamics, such as correlations
• Jean-Philippe's journey into finance
• The reliability of the Bloomberg terminal
• Dimensional analysis
• The inelastic market hypothesis
• Standing out in the Systematic Investor space
• Volatility strategies and if they have any connection to high-frequency data

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Follow Jean-Philippe on LinkedIn.

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Episode TimeStamps:

00:00 - Intro

02:38 - What area of physics did you work in, and how did you come into finance?

05:04 - Can you elaborate the paper you worked on, where you where you investigated the endogeneity of large price moves?

15:24 - How timely do you consider the Bloomberg feed to be? Is it quick enough?

19:18 - How do we stitch together the two ideas of micro market data

28:20 - Do you the believe in the research that is carried out using dimensional analysis?

32:58 - Do you think that the inelastic market hypothesis was driven by flows into passive vehicles?

37:13 - Regarding the biggest stocks in the S&P 500, is it true that if one stock is 10 times bigger than another stock, and it gets 10 times the dollar allocation, that the price impacts will be the same?

40:13 - Can you tell us about your journey so far with CFM?

50:21 - Do you still do Trend Following, and if so, how do you do it different from a standard Trend Follower?

52:08 - If you kill the beta in a Trend Following program, do you lose the convexity?

52:38 - What’s the relation between volatility and higher-frequency momentum systems, in your view?

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