Readers of Risk magazine have voted Marco Avellaneda, a professor at New York University’s Courant Institute of Mathematical Sciences, “Quant of the Year” for 2010 for his ground-breaking work on the effect of short-selling restrictions on stock prices. Quantitative analysts, or “quants,” employ numerical techniques to gauge financial markets.
Avellaneda’s paper, “A Dynamic Model for Hard to Borrow Stocks,” co-authored with Mike Lipkin of Katama Trading, was published in Risk in June 2009.
Avellaneda and Lipkin examine a component of a well-known phenomenon in the options market: a trading practice known as “short-selling,” in which investors borrow a stock to sell it, aiming to make a profit on its decline. In their study, Avellaneda and Lipkin found that as a stock becomes harder to borrow, buy-in activity increases, which results in a temporary spike in the share price.
Under typical market conditions, Avellaneda explains, there are equal numbers of buyers and sellers at a range of stock-price levels. So, if there are no sellers at a certain level of demand, the stock price will rise; by contrast, if there are no buyers at a given price level, the stock price will drop.
In their analysis, Avellaneda and Lipkin sought to capture feedback mechanisms under which short-selling affects stock prices. They found that if short selling is restricted or becomes expensive, the stock price will be marked by spikes and volatility.
New York University’s Courant Institute of Mathematical Sciences is a leading center for research and education. Established under the leadership of Richard Courant in 1935, the Courant Institute has contributed to U.S. and international science and engineering by promoting an integrated view of mathematics and computer science. The Institute is engaged in broad research activities, applying these disciplines to problems in biology, chemistry, physics, economics, and atmosphere-ocean science. The Courant Institute has played a central role in the development of applied mathematics, analysis, and computer science, and is comprised of a faculty which has received numerous national and international awards in recognition of their extraordinary research accomplishments. For more information please visit www.cims.nyu.edu.
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