The Black Swan: The Impact of the Highly Improbable · chapter 8 · id the-black-swan-c8-09-ltcms-specific-trades-involved
“LTCM's specific trades involved convergence arbitrage -- betting that bond spreads between, for example, on-the-run and off-the-run Treasury bonds would narrow. When Russia defaulted in August 1998, a global flight to quality caused these spreads to widen catastrophically instead of converging.”
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Receipts
Federal Reserve History: Near Failure of LTCMsource alive
LTCM had largely been betting on the spreads in its portfolios to converge. In almost every case after the Russian crisis, they diverged instead. The flight to quality and liquidity was the opposite of what LTCM's models predicted.
UC Berkeley: Lessons from LTCMsource alive
Russia suddenly devalued its currency and stopped payments on its debt in August 1998, spurring investors to seek safer and more liquid investments. LTCM's convergence trades diverged catastrophically.
University of Houston: LTCM Case Studysource alive
LTCM's strategies included convergence trades in government bond spreads, equity pairs, and mortgage-backed securities. The fund lost $553 million on August 21, 1998 alone as spreads widened across multiple markets simultaneously.
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