BLACK BOX MODEL What is a Black Box

BLACK BOX MODEL What is a 'Black Box Model‘ A black box financial model is a catch-all term used to describe a computer program designed to transform various data into useful investment strategies. The opposite of a black box is a system where the inner components or logic are available for inspection, which is most commonly referred to as a white box (which can also come be called a "clear box" or a "glass box").

BREAKING DOWN 'BLACK BOX MODEL' Within financial markets, the rise of black box methods possesses a number of risk management concerns. 1. systematic risk black box trading 2. proprietary technology, leaving regulators and investors without a true picture of operations which is needed to assess risk accurately. • A black box model is not inherently risky per se, but it does raise some interesting governance or ethical questions.

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THE BLACK BOX MODEL OVER THE YEARS • Over the years the use of black box models has gone in and out of style, usually depending on whether markets are up or down. During volatile patches, black box strategies are singled out for their destructive nature. Such as Black Monday and the portfolio insurance episode of 1987. Long-Term Capital Management’s implosion in 1998. And more recently, the ‘flash crash’ in August 2015. • Advancements in computing power, big data applications, and now, artificial intelligence and machine learning are further adding to the mystique of black box models using sophisticated quantitative methods. Hedge Funds and some of the world’s largest investment managers now routinely use a black box or black box like model to manage their complicated investment strategies.

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