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The Black Box: Eyewitness Testimony and Investment Models
Multiple discovery suggests that the most valuable, achievable advances in a field are often being examined simultaneously – yet independently – by many people at the same time. It stands to reason that on these occasions, leaps in logic can often occur at the same time by independent parties.
Keep ReadingNFL Parity, Sample Size and Manager Selection
We’ve been discussing issues around statistical significance – most notably, what makes a tested model’s results significant and therefore likely to perform in a consistent fashion when implemented in real time. In our last article we discussed what constitutes robustness in the context of testing a trading model.
Keep ReadingFaber’s Ivy Portfolio: As Simple as Possible, But No Simpler
We’ve been discussing sources of performance decay, degrees of freedom, and the implied statistical significance of systematic trading strategies, so I was pleased when some recent articles triggered an idea for a related case study.
Keep ReadingTowards a Simpler Palate
The current article series deals with the concept of performance decay, which occurs when the performance of a systematic trading strategy is materially worse in application than it appeared during testing. We dealt with the concept of arbitrage in our last post, drawing a parallel with the phenomenon of ‘multiple discovery’ in science.
Keep ReadingSources of Performance Decay
Above all, the greatest fear in empirical finance is that the out of sample results for a strategy under investigation will be materially weaker than the results derived from testing. There is absolutely no doubt that a meaningful portion of observed out-of-sample performance decay is the result of arbitrage; that is, others discovering and concurrently exploiting the same anomaly.
Keep ReadingValuation Based Equity Market Forecast – December 2013 Update
We first published a valuation based market forecast in September of 2010. At that time we used only the Shiller PE data to generate our forecast, and our analysis suggested investors should expect under 5% per year after inflation over the subsequent 10 year horizon. Over the 40 months since we have introduced..
Keep ReadingA fool thinks himself to be wise
As a team whose principals have spent thousands of hours accumulating academic credentials and experience in a fairly narrow field of expertise – public markets – we are endlessly fascinated with peoples’ optimism about their ability to succeed independently in this hyper-competitive domain.
Keep ReadingOne Factor to Rule Them All
Over the past few years there has been a loud and persistent chorus of complaints from market participants about the fact that markets are behaving like simple ‘risk on, risk off’ discounting mechanisms, where almost all of the risk seems to be emanating from a very small number of sources.
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