Financing with the Stars

written by Paul Feinberg

 
Prospectus
by Paul Feinberg

First Lady Nancy Reagan famously looked to the stars for answers, as did Presidents Theodore Roosevelt and Franklin D. Roosevelt. Financial astrologers are even a thing — they look to the stars to analyze keys to financial issues and stock markets. Allstate Professor of Insurance and Finance Francis Longstaff, on the other hand, is using financial models to look at the stars and analyze keys to the universe.

Longstaff teamed up with colleagues in UCLA’s Department of Physics and Astronomy to produce innovative research on astrophysical phenomena. Published in the August issue of The Astrophysical Journal, their paper, “A Formal Method for Identifying Distinct States of Variability in Time-Varying Sources: Sgr A* as an Example,” uses mathematical-finance principles to detect subtle variations in the Milky Way’s central, massive black hole. “We came up with a way of using standard financial statistical tools to detect when something unusual is going on with the black hole in the center of the galaxy,” he says.

The research, funded by a UCLA interdisciplinary grant, used those financial models to cut through the persistent data “noise” emanating from the black hole. “The fact that we’ve looked so hard at financial time series is novel to these guys. They’re used to looking for regular periodicities,” Longstaff says. Financial tools are used to dealing with the volatile stock market fluctuations. “That’s perfect for finding stuff that’s falling into a black hole,” he says. “It’s not regular.”

Longstaff, whose stellar fascination dates back to his teenage years, says the recent collaboration with colleagues from another section of campus was born at a dinner. “The more you talk to people in other fields and understand problems they’re dealing with, the easier it is to spot how you can port ideas across areas,” he says.

He says the support was incredible from Dean Judy Olian and the entire faculty for the collaboration analyzing the astrophysical data, which “behaves just like data in financial markets.” And, after all, as Longstaff says, “If you can understand stock markets, everything else in the universe is easier to understand.”