Archive for February, 2012
A Reality Check for Data Snooping (paper)
Do we really know what we think we know? White’s famous paper on his “Reality Check” procedure:
“Data Snooping occurs when a given set of data is used more than once for purposes of inference or model selection. When such data reuse occurs, there is always the possibility that any satisfactory results obtained may simply be due to chance rather than to any merit inherent in the method yielding the results. Our new procedure, the Reality Check, provides simple and straightforward procedures for testing the null that the best model encountered has no predictive superiority over a given benchmark model…”
A Constant Volatility Framework for Managing Tail Risk (paper)
“During crises, historical correlations between asset classes and their volatility characteristics tend to break down; asset classes which have, in normal times, been uncorrelated, suddenly become correlated and alternative investments, which have been selected based on their ability to generate alpha without beta, suddenly appear to deliver high beta with little alpha...”
A Study of Fat-Tail Risk (paper)
“…whereas the normal distribution of the daily return of the S&P would suggest a negative three-sigma event (between -3.56% and -2.36% daily returns) should have occurred 27 days over the last one hundred years, this has actually occurred over a hundred times in the 81 years since 1927. And the “normal” likelihood of a negative four-sigma event is one day every one hundred years; yet we have seen this take place an astounding 44 times since 1927…”
MF Global: The Blame Game
“The Enron bankruptcy was not the result of a failed energy industry; it was the result of a criminal conspiracy. The Madoff bankruptcy was not the result of a failed hedge fund industry; it was the result of a criminal conspiracy. The MF Global bankruptcy is not the result of a failed futures industry; it is the result of criminal activity on the part of senior staff at MF Global…”
High-Frequency Follies
“HFT traders were very active from July 2011 to September 2011. From July 8 to Aug. 8 the Dow fell 17.3%—13.4% in the first six trading days of August alone. The CBOE Volatility Index (VIX), dubbed the “fear index,” traded at 16 in early July but moved up to 48 by Aug. 8. Panic was everywhere. HFT was both hyperactive and hyperprofitable in this period, while individual and institutional investors lost more than $3 trillion…”
High-Frequency Trading (paper)
“High-frequency trading (HFT) has recently drawn massive public attention fuelled by the U.S. May 6, 2010 flash crash and the tremendous increases in trading volumes of HFT strategies. Indisputably, HFT is an important factor in markets that are driven by sophisticated technology on all layers of the trading value chain. However, discussions on this topic often lack sufficient and precise information. A remarkable gap between the results of academic research on HFT and its perceived impact on markets in the public, media and regulatory discussions can be observed.”
James Rickards on the Huge Threats to the Financial Markets
“One of the most astonishing revelations of the past decade has been how little we really understand about risks in our financial markets. The ‘once in a thousand year‘ events which previously inhabited the extreme end of the left-tail are (increasingly) manifesting in our markets leaving devastating consequences.”
Nanosecond Trading Could Make Markets Go Haywire
“With many algorithms converging on just a few different strategies, the high-frequency trading market could become vulnerable to systemwide herd behaviors. Fortunately for us, the market seems to rebound from spikes almost as immediately as they occur…but as seen in May 2010, this might not always happen.”
An Interview with Ernest P. Chan (Quantitative Trading)
“Equity strategies are becoming less profitable because of the lower volatility in the market (notwithstanding August 2011), higher correlation among stocks, and the rise of high frequency trading…”
Man vs Machine: Inside the World of Computer-Driven Stock Trading
CNBC’s big pile o’ algorithmic trading articles (click title for link).