Capital Ideas and Market Realities: Option Replication, Investor Behavior, and Stock Market Crashes

In Capital Ideas and Market Realities, Bruce Jacobs sifts through the history of modern finance, from the efficient market hypothesis to behavioral psychology and chaos theory, to determine the cause of recent market crashes. He finds that some investment strategies, especially those based on theories that ignore the human element, tend to self-destruct, and can take markets down with them. Ironically, it is often those strategies that purport to reduce the risk of investing that can pose the greatest danger. Of particular concern are trading strategies based on the Nobel Prize-winning option pricing model. This model gave rise to option replication, a technique for synthesizing the payoffs to an option by trading between the underlying asset and cash. Replication requires selling as stock prices decline and buying as stock prices rise. When enough money follows this type of trend-following "dynamic hedging," bubbles and crashes can result. In 1987, trading related to an option replication strategy known as "portfolio insurance" led to the largest crash in U.S. market history. Today, similarly mechanistic trading underlies trillions of dollars in exchange-traded and over-the-counter options and swaps, as well as myriad institutional and retail products designed to provide investors with excess returns at low or no risk. Capital Ideas and Market Realities uncovers the risks these strategies pose for market stability and investor wealth. The book has also become a lightning rod in the debate over the need for better investment product risk disclosure.

Business & Money

Markowitz, Harry M.

Jacobs, Bruce I.

Economics

Wiley/Blackwell

The classic guide to quantitative investing―expanded and updated for today’s increasingly complex markets
From Bruce Jacobs and Ken Levy―two pioneers of quantitative equity management― the go-to guide to stock selection has been substantially updated to help you build portfolios in today’s transformed investing landscape. 
A powerful combination of in-depth research and expert insights gained from decades of experience, Equity Management, Second Edition includes 24 new peer-reviewed articles that help leveraged long-short investors and leverage-averse investors navigate today’s complex and unpredictable markets. 
Retaining all the content that made an instant classic of the first edition―including the authors’ innovative approach to disentangling the many factors that influence stock returns, unifying the investment process, and integrating long and short portfolio positions―this new edition addresses critical issues. Among them--
• What’s the best leverage level for long-short and leveraged long-only portfolios? • Which behavioral characteristics explain the recent financial meltdown and previous crises? • What is smart beta―and why should you think twice about using it? • How do option-pricing theory and arbitrage strategies lead to market instability? • Why are factor-based strategies on the rise?
Equity Management provides the most comprehensive treatment of the subject to date. More than a mere compilation of articles, this collection provides a carefully structured view of modern quantitative investing. You’ll come away with levels of insight and understanding that will give you an edge in increasingly complex and unpredictable markets. 
Well-established as two of today’s most innovative thinkers, Jacobs and Levy take you to the next level of investing. Read Equity Management and design the perfect portfolio for your investing goals.

Equity Management: The Art and Science of Modern Quantitative Investing, Second Edition

Levy, Kenneth N.

Finance

McGraw=Hill

Too Smart for Our Own Good: Ingenious Investment Strategies, Illusions of Safety, and Market Crashes

McGraw-Hill Education on Brilliance Audio

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Books by Jacobs, Bruce I.