On April 21, 2015, the U.S. Department of Justice announced that it would press criminal charges against Mr. Navinder Singh Sarao, a 36-year-old small-time British day-trader. He is being blamed for nothing less than causing the “Flash Crash” of May 6, 2010, the second largest point swing (1010.14 points) and the biggest one-day point decline
Continue reading Lessons from the “Flash Crash” regulatory fiasco
Investors worldwide turn to financial advisors when making key decisions such as whether or how they should convert an employer-based retirement account (such as a “401(k)” account in the U.S., an “RRSP” in Canada, “Super” in Australia) to an individually-directed retirement account (such as an individual retirement account or “IRA” in the U.S.). However,
Continue reading How much do investors lose from conflicted advice?
A Swiss chocolate surprise
The surprise move of the Swiss National Bank on 15 January to abandon its cap on the euro exchange range sent shock waves through global markets and exposed numerous instances of investment funds and trading operations that had made too-risky bets in the currency markets. Among the casualties are the following:
Continue reading Swiss franc episode exposes risky investments
Predicting the future has never been easy, but the standard today is the same as in ancient times: does the prediction come true? As an ancient Hebrew author wrote, “When a prophet speaketh, … if the thing follow not, nor come to pass, … the prophet hath spoken it presumptuously: thou shalt not be afraid
Continue reading How have 2014 market prophets fared?
When numbers of any sort are presented, whether in mathematics, science, business, government or finance, the default assumption is that the data presented are reasonably reliable to the last digit presented. Thus, if a light bulb is listed as using 3.14 watts, then its actual usage is presumably between 3.13 and 3.15 watts, and certainly
Continue reading Dubious digits: Is this data really that accurate?
One central difficulty of investing, both in the U.S. and internationally, is that most individual investors are not sufficiently well-informed on financial matters (or else are not sufficiently disciplined in their approach), and thus often make less-than-optimal choices in managing their long-term savings. The 2014 DALBAR report, for instance, concluded that over the past 20
Continue reading Index investing: “Confidence in the mathematics”
Challenging times for hedge funds
Recently attention has been drawn to the fact that the advantage enjoyed by hedge funds over more conventional investment vehicles has been eroding. For example, the annualized “excess return” of the HFRI equity hedge fund index (adjusted for certain factors, 60 month rolling average) has declined from approximately 15% in
Continue reading Is “cherry picking” a factor in hedge fund performance?
We are pleased to announce the availability of a new online tool to demonstrate and analyze the phenomenon of backtest overfitting. It is available HERE. It was developed by researchers at the Scientific Data Management Group at Lawrence Berkeley National Laboratory, with contributions and suggestions from several other persons. A complete list of contributors
Continue reading New online tool to demonstrate backtest overfitting
A June 2014 study released by the Employee Benefit Research Institute concluded that many U.S. Baby Boomer and Gen Xer households are expected to run short of money in retirement (assuming 35 years in retirement): 83% of those in the lowest income quartile, 47% in the second quartile, 28% in the third, and 13%
Continue reading How financially literate are individual investors?
On 12 July 2014, David H. Bailey and Jonathan M. Borwein (two of the bloggers on this site) presented the talk Scientific Integrity in Mathematical Finance at the Workshop on Optimization, Nonlinear Analysis, Randomness and Risk, held at the Centre for Computer-Assisted Research Mathematics and its Applications (CARMA), University of Newcastle, Australia. The viewgraphs for
Continue reading Bailey and Borwein give talks on integrity and reproducibility in mathematical finance