Andrew Lo, the Right Kind of Finance Academic

MIT's Andrew Lo is perhaps the most market-savvy academic out there, probably because he runs a hedge fund as well as MIT's Laboratory for Financial Engineering (you can check out my previous posts on Dr. Lo). Not entirely coincidentally, he is a proponent of technical analysis (as his presentation to the MTA a couple of years ago can attest to) and an opponent of the random walk theory of market prices (he is the author of the transparently and aptly titled A Non-Random Walk Down Wall Street). All this to say that I read his interview by Mike Hogan in the latest Barron's with great anticipation and I was not disappointed.

Here are a few notable excerpts (emphasis mine):

The years 2007 through 2009 were all about liquidity or the lack of it. Just as we have in every previous meltdown, we saw an unwinding of liquid positions to cover illiquid positions in 2008 and a sudden flight to quality. Correlation is the flip side of liquidity. It is only when there is a liquidity shock that you discover how correlated supposedly uncorrelated assets really are. [...]

We financial designers often try to think like physicists. But it's human beings who invest in the stock market, and they have feelings and behaviors that change with changing circumstances. Unlike physical laws that have operated exactly the same over billions of years, economic laws depend on who happens to show up in the market on a given day and how they feel about what they see when they get there. [...]

As a consequence of population growth and better communications, the [financial-services] industry is much more complex and competitive today, which has been a boon to investors. We have more liquidity, commissions are at the lowest they have ever been, and individuals can gain access to 60 markets around the world in the click of a mouse. But given the speed with which bets can flow back and forth across borders now and assets can align with one another, it's increasingly difficult to find the diversification investors need to manage their way through market swings. [...]