How the Federal Reserve and the rise of passive investing and volatility strategies have combined to make market movements faster and more severe.
Corey Hoffstein is the founder and chief investment officer of Newfound Research LLC, a quantitative research and investment fund. He is also the host of the “Flirting with Models” podcast.
His most recent research is “Liquidity Cascades: The Coordinated Risk of Uncoordinated Market Participants.”
In it, he examines three popular narratives about what is driving radical swings in markets, including:
- The increased role of the Federal Reserve
- The rise of passive and index investing
- The growth of volatility-correlated strategies
He finds that, individually, none could explain the radical market shifts we’ve seen. However, when combined, they create a market incentive loop that is causing markets to move and react to exogenous shocks more quickly and aggressively than ever before.
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