Are financial markets too complex?
Abstract
The global credit market has plummeted and the collapse of various hedge funds has raised fears that the credit market conflagration could become a true economic crisis. Richard Bookstaber, a former academic, who went on to head risk management for Morgan Stanley, and now runs a large hedge fund at FrontPoint Partners, argues in his book A Demon of Our Own Design that financial markets are too complex for their own good and that creates the risk of a financial disaster. Mr Bookstaber claims that a crude strategy (like being guided by a few benchmarks, or sticking to stocks, bonds and cash), is more likely to survive a change in the environment - even if todays far more complex strategies might work better in this current environment. He rules out extra regulation and suggests that hedge funds be left alone. Why do markets keep crashing and how much of that is caused by the complexity of financial instruments? Mr Bookstaber answers your questions below.
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