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Tail Risk: About 5x Worse Than You May Think (paper)

“We examined 50-years of historical S&P 500 Index data and compared the actual tail risk frequency and magnitude to the expectations of a typical investor operating under modern portfolio theory. The difference between the two is surprising, and it suggests that investors have significantly underestimated tail risk frequency and severity”



The Microstructure of the Flash Crash (paper)

“The ‘flash crash’ of May 6th 2010 was the second largest point swing (1,010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. For a few minutes, $1 trillion in market value vanished. In this paper, we argue that the ‘flash crash’ is the result of the new dynamics at play in the current market structure…”



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…”


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.”


Is Momentum Really Momentum? (paper)

The authors of this paper ran some fairly rigorous tests on the classic J/K momentum strategy and concluded that intermediate term (7-12mos) momentum outperforms short term momentum.  They claim that these results are not confined to stocks, but apply to indices, commodities, and currencies as well.

(click on title for paper)



What Happened To The Quants In August 2007? (paper)

Interesting paper that discusses outlier losses experienced by long/short hedge funds during 2007 and proposes an interesting EOD RTM strategy (one I developed and tested myself prior to coming across this paper, dammit!):

“Given a collection of N securities, consider a long/short market-neutral equity strategy consisting of an equal dollar amount of long and short positions, where at each rebalancing interval, the long positions are made up of losers (underperforming stocks, relative to some market average) and the short positions are made up of winners (outperforming stocks, relative to the same market average).  By buying yesterday’s losers and selling yesterday’s winners at each date, such a strategy actively bets on mean reversion across all N stocks, profi ting from reversals that occur within the rebalancing interval.”

(click on title for link)



Jump Diffusion Processes (paper)


Mean Reverting Processes (paper)