Authors:
Dmytro Matsypura
and
Vadim G. Timkovsky
Affiliation:
The University of Sydney Business School, Australia
Keyword(s):
Combinatorial, Crash, Margin, Optimization, Market, Mixed, Integer, Program, Risk, Stock, Strategy.
Related
Ontology
Subjects/Areas/Topics:
Applications
;
Artificial Intelligence
;
Knowledge Discovery and Information Retrieval
;
Knowledge-Based Systems
;
Mathematical Modeling
;
Methodologies and Technologies
;
Operational Research
;
Optimization
;
Optimization in Finance
;
Risk Management
;
Software Engineering
;
Software Project Management
;
Symbolic Systems
Abstract:
In July 2005 the US stock market started using the risk-based approach to margining customer accounts gradually excluding from margining practice the strategy-based approach, which has been used for more than four decades. In this paper we argue that this change has a direct link to the stock market crash of October 2008. We also show that among the main reasons of this change are high strategy-based margin requirements in comparison with much lower risk-based, the combinatorial complexity of the strategy-based approach, and the failure of the brokerage industry to adopt the achievements of combinatorial optimization.