Abstract
Computer-based algorithms & models have become important in trading in financial markets. We illustrate the significance of model analysis of financial systems by a case study of BlackRock’s analytical platform called ‘Aladdin’. The nature of the model used in a computer algorithm is central to its real performance. Unreal models in financial algorithms will yield inaccurate performances. We review five fundamental models of economic dynamics: (1) traditional price-equilibrium of a commodity market, (2) Keynes-Minsky financial transactions over time, (3) price-disequilibrium of a financial market, (4) investment bank market disequilibrium process, and (5) disequilibrium financial grid of international capital flows. Empirically-valid graphic models are necessary – in order to methodologically develop societal-useful normative economic theory -- based upon the real natural-experiments of societies in economic history.
Highlights
Computer-based algorithms & models have become important in trading in financial markets
Aladdin is a network of code, trades, chat, algorithms and predictive models that on any given day can highlight vulnerabilities and opportunities connected to the $15 trillion the firm tracks — $10 trillion of which belongs to outside firms that pay BlackRock a fee to have access to the platform
As a clue to its analysis capabilities, we recall that Landon Thomas Jr. wrote: “Aladdin is a network of code, trades, chat, algorithms and predictive models that on any given day can highlight vulnerabilities and opportunities connected to the $15 trillion the firm tracks — $10 trillion of which belongs to outside firms that pay BlackRock a fee to have access to the platform. “ (Thomas, 2016)
Summary
BlackRock is an asset-management company, managing about $4.1 trillion dollars of assets, with about 51% invested in equity, 29% in bonds, 7% in mixed portfolios of equity and bonds, 7% in money-market funds, 2% in hedge funds, and about 1-3% in other assets. U.S Federal Government had to step in and rescue the U.S banks and the Wall Street financial system, buying ‘toxic assets’ They made use of Aladdin’s analytic services. Mr Fink realized that his clients on the “buy side” (the fund managers, insurance companies and pension funds shopping for investments) had become dependent on the ability of the “sell side” (the Wall Street investment banks) to analyze mortgages. Landon Thomas Jr. wrote: “Through its big data-mining risk platform, Aladdin (Asset Liability and Debt and Derivatives Investment Network) BlackRock says it has developed the market’s most highly evolved framework for stress-testing how securities will respond to certain situations — such as a sudden rise in interest rates or what happens in the event of a political surprise . Seventy-five firms — including Deutsche Bank’s asset management unit and Freddie Mac — managing a total of $10 trillion, use it.” (Thomas, 2016)
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