Many investors, individual and institutional, have come to the conclusion that index-linked investments are a rational and, in the long term, profitable investment strategy.
It is certainly true that many individual investors could do far worse that merely investing, say, in a S&P500 index fund or exchange-traded fund (ETF). As we described in a previous
Continue reading Do new backtested index ETFs outperform the market?
Recently two books have appeared that highlight “dark pools” (i.e., new trading venues that permit one to keep trading activity relatively private, at least for a limited time), and “high-frequency trading” (i.e., trading performed by computer algorithms and keyed to very fine-grained time intervals):
Dark Pools (2012). Scott Patterson, a staff reporter for
Continue reading Review of “Dark Pools” and “Flash Boys”
A recent Globe and Mail blog repeats an oft-cited claim that the U.S. stock market is weaker in mid-term election years (MTEYs). According to this blog, stock markets “have traditionally been weaker than normal during mid-term election years. Price returns during these four-year cycle lows have been atypically negative in January, but then frequently favorable
Continue reading Is the stock market weaker during mid-term election years?
Our recent papers [1,2] on backtest overfitting have attracted significant interest, including several press releases [American Mathematical Society, University of Newcastle] and news articles [Financial Times, Bloomberg, Barron's]. The feedback so far has been encouraging, and numerous colleagues have approached us with interesting questions and requests for clarification. This blog lists and responds to a
Continue reading FAQs on Backtest Overfitting
The rise of quantitative investing
With the dramatic increase in computation power available in recent years, quantitative methods are gaining momentum in the finance world. The results, however, are mixed. The Renaissance Fund, founded by brilliant mathematician James Simons, has produced an average annual return of 35%, after fees, over a period of 25 years.
Continue reading Pseudo-mathematics and financial charlatanism
CXO’s evaluation of forecasters
The CXO Advisory Group of Manassas, Virginia, which offers “objective research and reviews to aid investing decisions,” has just published an interesting evaluation of equity market forecasts. Titled Guru Grades, the column concludes that the class did not do very well!
CXO evaluated a total of 6582 forecasts for the U.S.
Continue reading A sobering analysis of financial gurus’ market forecasts
On Wednesday March 26, 2014 at 11:15am Marcos Lopez de Prado and David H. Bailey, two of the bloggers on this site, jointly presented a talk How to spot backtest overfitting at the Battle of the Quants meeting in New York City.
The Battle of the Quants conferences, organized by Bartt C. Kellerman of Global
Continue reading Lopez de Prado and Bailey speak at “Battle of the Quants”
A “scary chart” has recently made the rounds of numerous financial analysts and news commentators. It exhibits what appears to be a disturbing parallel between the current U.S. stock market and the DJIA in the period (1928-1929) just prior to the 1929 crash. A MarketWatch.com article, for instance, warns that if the U.S. stock market
Continue reading The “scary chart” fallacy
[Editorial note: During the next few weeks, each of the editors of the Mathematical Investor will provide, in an essay format, some personal background explaining the origins of their interest and work in this area. This is a perspective essay by Qiji J. Zhu.]
Education and research
I entered college and started my academic career
Continue reading The Mathematical Investor: A personal perspective by QJZ
“Risk takers have been encouraged by a perceived increase in economic stability to reach out to more distant time horizons. But long periods of relative stability often engender unrealistic expectations of it[s] permanence and, at times, may lead to financial excess and economic stress.” — Alan Greenspan, testimony before the House Financial Services Committee on
Continue reading Fedspeak, Karl Popper and market directions