# Global Macromodel and Liquidity Observatory

# Global Macromodel and Liquidity Observatory

SIM Research Institute is the founder of Investment Systems Theory. At the core, Investment Systems Theory provides an alternative view of the market compared to that of the Dynamic Stochastic models typically used in finance, which serves to resolve many of the issues facing financial investors today.

Investment Systems Theory asks three key questions about the nature of investing:

What causes extreme events?

- Theory

The idea of extreme events is born out of the theory that markets seek equilibrium and that events will be normally distributed. This ties the concept of "extreme" to a simple computation of standard deviation and leads to the set of Dynamic Stochastic investment models used in financial theory.

- Reality

The normal distribution is highly unlikely to occur perfectly in a complex system. Changing from normal-equilibrium to dynamic-disequilibrium takes into account the natural skew of the actual market environment and changes black swans into opportunities.

What is investment risk?

- Theory

Risk arises due to uncertainty in measuring the future performance of an investment asset. Under the paradigm of the normal distribution the standard deviation becomes an adequate measure of uncertainty allowing risk to be measured by volatility.

- Reality

Volatility is a poor measure of risk as it measure equally the "risk" of surplus gains as it does the risk of adverse losses. Investment risk consists not of the fluctuations in the portfolio, but in the drawdowns, which can be better targeted with a non-volatility risk approach.

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What drives returns?

- Theory

Returns are the compensation investors receive for taking on risk. The higher the risk of the investment or asset the more returns the investor needs as compensation. This create a linear relationship between the two aspects of investment.

- Reality

The causal relationship of returns is not risk but expansion, either expansion in the productive economy, or through capital expansion in the financial economy. When these two aspects of expansion reach saturation returns must reduce despite overall risks increasing.