This is a summary of links featured on Quantocracy on Wednesday, 02/02/2022. To see our most recent links, visit the Quant Mashup. Read on readers!
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Exogenous risk overlay: take two [Investment Idiocy]This is a short follow up post to one I did a couple of years ago, on "Exogenous risk management". This was quite an interesting post which dug into why expected risk changes for a typical diversified futures trading system. And then I introduced my risk overlay: "Now we have a better understanding of what is driving our expected risk, it's time to introduce the risk overlay.
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Backtest overfitting and the post-hoc probability fallacy [Mathematical Investor]In several articles on this site (see, for instance, A and B), we have commented on the dangers of backtest overfitting in finance. By backtest overfitting, we mean the usage of historical market data to develop an investment model, strategy or fund, where many variations are tried on the same fixed dataset. Backtest overfitting, a form of selection bias under multiple testing, has long plagued
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What Explains the Momentum Factor? Frog-in-the Pan is Still the King [Alpha Architect]A lot of ink has been spilled on a seemingly simple question: Why does the momentum factor exist? We have done our fair share contributing to the question and our collective conclusions are in our book Quantitative Momentum. We walked away from the question and determined the following: We will never really know why the momentum factor actually exists. But we know that is does exist and it is