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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 follows the same script, “trouble lies directly ahead.” One version of the chart is the following (source: McClellan Market Report, via Matthew O’Brien):
So what are the facts here? Should investors dump their portfolios immediately?
The problem with this graph, like many of its
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 in 1978 after spending the last several years of the `cultural revolution’ in a farm. My graduate and post graduate research first started in control theory dealing with control systems modeled by ordinary, partial and stochastic differential equations in Zhejiang University, Hangzhou, Fudan University, Shanghai,
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 July 20, 2005.
Confused? You are not alone. This is a typical example of what is known in the financial world as Fedspeak — obscure language used by U.S. Federal Reserve Chairmen in unavoidable public speeches, so as not to cause unnecessary market instability. Alan Greenspan is
Continue reading Fedspeak, Karl Popper and market directions
The Mistress of Investment Management
Until a few years ago, applied mathematics had a very limited role in the financial profession. Standard applications involved pricing of derivative products and convex portfolio optimization. But with the advent of High-Frequency Trading and Big Data, Mathematics is now pervasive. Today, virtually every investment decision requires the analysis of massive amounts of unstructured data. Algorithms must be developed to order, filter, process, store, visualize that data. And that is before we are ready to model it! Networks must be designed to handle flows of information from multiple sources of varying quality. Optimization methods are
Continue reading Seminar at the International Association for Quantitative Finance
[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 Jonathan M Borwein.]
Early interest in economics and finance
I went to Oxford in 1971 to study functional analysis and number theory but ended up (very quickly) working in Optimization theory with Michael Dempster, who even then was running models of the full non-defence US budget. My early history is described in a chapter of a forthcoming book. My
Continue reading The Mathematical Investor: A personal perspective by JMB
According to a recently-published article on “early warning indicators,” the gain or loss of the S&P500 index (a widely cited metric of the U.S. stock market) during the seven trading days around the new year (the last five days before and the first two days after the new year) predicts the performance of the index for the entire coming year with 85% accuracy. An accuracy level at 85% is very high by any standard. Nevertheless, scientifically literate investors will find this claim unsatisfactory.
First of all, the period over which this indicator is tested is not specified. More importantly, if
Continue reading Testing early warning indicators
In discussions of finance and investment, it is routine to see disclaimers such as “may lose value,” and “past performance is no indication of future results.”
However, as we have pointed out in our paper Financial charlatanism: The effects of backtest overfitting on out-of-sample performance, even this may be a bit optimistic, as certain investment strategies, marketed to the public as money-winning, actually might be pretty much guaranteed to be money-losing, particularly when fees and other expenses are considered.
These considerations raise the question: Are individual investors equipped to make the sorts of financial decisions that increasingly are required of
Continue reading Are individual investors equipped to make basic financial decisions?
It is not often that one hears the name of Ludwig Wittgenstein (1889-1951) mentioned in an investment forum. Perhaps it is because the great Anglo-Austrian positivist philosopher gave away his entire inheritance at the age of 30. Quite a brave thing to do, having been born into one of Europe’s wealthiest families, with a fortune comparable to that of the Rothschilds.
You see, Ludwig wanted a do-it-yourself life, he wanted to achieve something based on his own merit. Three of his brothers committed suicide, and poverty probably saved his life and mind (“Tell them I’ve had a wonderful life”).
By his
Continue reading What Wittgenstein can teach all of us about investing
With the approach of the holiday season, holiday-related investment advice has become increasingly fashionable. Here is the latest: a claim of a ‘less well-known fact’ that large-cap stocks outperform small-cap stocks in December versus the ‘well-known fact’ that the reverse is true in January. The article then suggested a simple strategy to boost one’s portfolio: overweight large-cap stocks in December, then switch to small-cap stocks in January.
How much advantage can one obtain using this strategy? We decided to test it.
We used the SP600 Barra Value and SP600 Barra Growth indices as proxies for small-cap stocks (historical data is
Continue reading Do large cap stocks boost portfolio performance at year’s end?
[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 David H. Bailey.]
Early interest in economics and finance
Although I only recently began to delve into the world of financial mathematics in any technical depth, I have been interested in (indeed, fascinated by) the world of economics and finance for many years. During my senior year at Brigham Young University, I very much enjoyed a course in economics
Continue reading The Mathematical Investor: A personal perspective by DHB
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