Just as Geometry could not help Euler solve the “Seven Bridges of Königsberg” problem, Econometric analysis or Linear Algebra alone are not able to answer many key questions about how financial markets coordinate. Statistical tables are detailed in terms of reporting estimated values,...

Most firms and portfolio managers rely on backtests (or historical simulations of performance) to select investment strategies and allocate them capital. Standard statistical techniques designed to prevent regression over-fitting, such as hold-out, tend to be unreliable and inaccurate in the...

A large number of quantitative hedge funds have historically sustained losses. In this study we argue that the backtesting methodology at the core of their strategy selection process may have played a role.* Most firms and portfolio managers rely on backtests (or historical simulations of...

We prove that high simulated performance is easily achievable after backtesting a relatively small number of alternative strategy configurations, a practice we denote “backtest overfitting”. The higher the number of configurations tried, the greater is the probability that the backtest is...

Investing can be characterized as a data science problem. While investment firms have attracted scientific talent, they have done a poor job at developing it. Firms hire specialists, but entice them to become generalists (e.g., portfolio managers). Under the ubiquitous silo/platform structure,...

A large portion of Macroeconomic and Financial research is built upon classical applications of Linear Algebra (such as regression analysis) and Stochastic Calculus (such as valuation models). As a result, most Macroeconomic and Financial research has inherited a focus on geometric locations...

Inspired by visualization techniques à la Feynman, we introduce Stochastic Flow Diagrams (SFDs), a new mathematical approach to represent complex dynamic systems into a single weighted digraph. This topological representation provides a way to visualize what otherwise would be a morass of...

* Investment management firms routinely hire and fire employees based on the performance of their portfolios.* Such performance is evaluated through popular metrics that assume IID Normal returns, like Sharpe ratio, Sortino ratio, Treynor ratio, Information ratio, etc.* Investment returns are...

Machine learning (ML) algorithms utilize the power of computers to solve tasks that are beyond the grasp of classical statistical methods. However, ML is often perceived as a black-box, hindering its adoption. This seminar demonstrates the use of Shapley values to interpret the outputs of ML...