Bio: Dr. Michael Isichenko graduated from Moscow Institute of Physics and Technology (MIPT) and holds PhD from MIPT and ScD from Kurchatov Institute of Atomic Energy, both in theoretical physics. He worked on multidisciplinary subjects in plasma physics, turbulence, statistical physics, and chaos theory at Kurchatov Institute (Moscow), University of Texas (Austin), and University of California (Santa Barbara and San Diego). After failing to secure a tenured position in academia, he moved to quantitative trading and portfolio management and worked at Caxton Corporation, SAC, SocGen, and Jefferies. Author of Quantitative Portfolio Management: the Art and Science of Statistical Arbitrage (Wiley, 2021). Currently runs quant and trading analytics research at Bloomberg L.P.
Title: Paradoxes of inelastic equity market
Abstract: We discuss phenomenological models of inelastic stock market response to aggregate money flows, including a model with a semi-permanent price impact. The conservation of money in financial transactions means that the aggregate cash investments go through rather than into the stock market, while not reaching the economics of stock issuers in any significant way but affecting stock prices via forces of supply and demand. Market microstructure embedded in a complex graph of money flow implies that the net flow of funds sets overall stock prices via price impact mechanics rather than economics. We argue that the overall secondary stock market capitalization is the result of limited supply of shares and growing demand by households, primarily via large institutions such as mutual and pension funds, and somewhat technical inelastic effects, rather than reflective of the underlying economic activity or enterprise value of the stock issuers. This observation makes long-term equity investment an economic paradox and raises further questions. The views expressed in this presentation are solely the author’s and do not necessarily represent the views of his employer.
