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 Mathematical Investor blog, the typical U.S. equity investor has significantly underperformed the S&P500, with similarly dismal results in other asset categories. In particular, the average equity investor has a 20-year return of 4.25% per annum, compared with a 8.21% average return of the S&P500, for
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
Dark Pools (2012). Scott Patterson, a staff reporter for the Wall Street Journal, introduces the reader to computerized trading algorithms, then recounts the history of the emergence and proliferation of independent trading venues and computerized trading. We learn about the many small firms that rose to prominence — e.g., Island, Instinet, Archipelago, Datek, Getco, Tradebot
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 in February. What’s more, March also typically posted an gain, just before a string of sub-par performances from April through September, with two-thirds of these months recording average declines.”
This is, in fact, one version of the presidential election market cycle theory first proposed by
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, Science Daily, University of Newcastle] and news articles [Financial Times, Wall Street Journal, Bloomberg, Barron’s, Pacific Standard, Morningstar, Seeking Alpha]. 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 number of these items.
1. Why do so many quantitative investments fail? In the 21st century, we are surrounded by math and algorithms designed to filter noise out of signal. Why is it that the same science
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. Yet other quantitative funds have failed, sometimes miserably. Solid, mathematically-driven investment methods are as profitable as they are scarce!
The public rarely learns about the highly successful funds or has the opportunity to invest in them. Unfortunately, the void between the public and highly scientific investment operations is
Continue reading Pseudo-mathematics and financial charlatanism
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