The myth of the Halloween indicator

Holiday season is coming and so is holiday related investment advice. Right before Halloween (31 Oct 2013), the Halloween Indicator emerged in the Wall Street Journal online site suggesting that during the six months from Halloween (October 31) to May Day (May 1), the market has a higher return compared to the other six months.

Eager to find out how much edge this indicator will provide, we compared a buy-and-hold-the-DJIA strategy from 1915 to 2012 versus taking a position only during the six-month period from October 31 to May 1. The equity curve for these two strategies both starting with one

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November 15th, 2013 | Category: Essays | Comments are closed

The art of investing

Bravery or recklessness?

Investing is often referred to as an Art: The Art of Investing. True artists may object to this analogy, but, in any event, the key implication is that quantitative methods have a very limited applicability to investment problems, and mathematical (i.e., formally rigorous and logical) arguments are essentially misguided. Proponents of this philosophy often assert that investing is just too complex, with too many free variables, for mathematical methods to be of much use. But aren’t biological, chemical or nuclear systems also complex, and yet Mathematics has become the indispensable tool to understand them?

Every human activity

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November 15th, 2013 | Category: Essays | Comments are closed

Two tales of the Kelly formula

Kelly’s formula is a theoretical benchmark for deciding the appropriate position size when gambling. A divergence in attitude towards this theory illustrates the disconnect between academicians and practitioners, and the necessity of closer collaboration between the two circles, a point we argued in The Two Towers of Finance.

To understand the essence of Kelly’s formula, let us consider the question: Can one lose money in a game in which one has a favorable probability of winning? The answer is, absolutely yes. To see why, think of the simple game of tossing a biased coin: heads means that the player wins

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October 27th, 2013 | Category: Essays | Comments are closed

The two towers of finance

Most fresh graduates from business schools and mathematical finance programs quickly awake to a shocking realization: Very little of what they learned during their studies is applied in the real world. There is a disconnect between the academics and practitioners of finance. Very few practitioners get involved in academic activity, and some academics consider practical experience as beneath them, something that would pollute their credentials.

It is a fascinating state of affairs, without much parallel in other disciplines. Most physicists and many mathematicians regularly get involved in solid applied mathematical projects, often working in laboratories side by side with biologists,

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October 21st, 2013 | Category: Essays | Comments are closed

Welcome to the Mathematical Investor blog

This blog, and the associated MAFFIA website, are devoted to research in financial mathematics, computational aspects of financial mathematics, and the larger realm of computing, science and society. In this blog, we will especially focus on helping readers distinguish between rigorously established mathematical finance techniques, and the unfortunately much larger body of highly questionable techniques that sadly pervade the financial community and financial news.

We plan to post items regularly to this blog, with a frequency of once a month or so, for the indefinite future.

Overview

Please read this Overview of the Mathematical Investor blog, which outlines its scope

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October 19th, 2013 | Category: Essays | Comments are closed
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