From Random Walks to Phase Transitions: Information and Trading

I will discuss ideas in modern quantitative finance from the perspective of a theoretical physicist. Starting from the classic picture of price fluctuations as random walks, I will explain how practitioners identify collective modes, or “factors,” and use them to isolate residual predictability, or “alpha.” The problem of trading on such predictions naturally becomes a problem in control theory, with close analogies to signal transmission through a noisy channel. In a simple model, one finds a cascade of bifurcation transitions: from no trading, to discrete buy/hold/sell policies, to progressively finer discretizations, with continuous linear-quadratic control recovered in an appropriate limit.

Speaker: Shamit Kachru, Stanford University