Publications: Notes at the Margin

Revenge of the Quants: Robert Merton's Oil Price Crash (November 26, 2018)


Oil prices declined sharply last week. Dated Brent dropped twelve percent from Friday, November 16, to Friday, November 23. Cash WTI would have fallen eleven percent had Platts reported a price Friday. The sudden decline in oil prices had nothing to do with an unanticipated change in supply and demand. The decrease also had little to do with changes in market expectations. The cause of the decline instead lies in a single word: liquidity—or rather the lack of liquidity. This was a market meltdown caused entirely by the "quants," that is, by the theory that drives the quants. The price collapse last week was almost certainly prompted by the hedging of derivatives written primarily to independent oil producers in the United States.


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