Investing Research Articles

Just what does it mean to be a quant? In his December 2002 article entitled “The Boy’s Guide to Pricing & Hedging “, Emanuel Derman offers an “abbreviated poor man’s guide” to quantitative finance. He observes that:

…hedge portfolios of matched pairs of stocks has offered persistently solid risk-adjusted returns, but diminishing raw returns, over the past 40 years.

…evidence indicates that the Australian stock market offers a strong value premium and a weak size effect.

…over the long term, systematic use of stop losses in trading individual stocks does not enhance the level of returns, but certain trailing stop losses reduce trading risk (standard deviation of returns).

…commodity futures trading strategies that combine momentum and roll return may offer strong performance largely uncorrelated with those of stocks and bonds.

…the ability of commonly used indicators to predict near-term (one-month) stock market returns appears during economic recessions (periods of high return volatility) but vanishes during economic expansions.

…systematic use of stop-loss orders may be beneficial, especially if one can project the general price trend and apply stop losses accordingly.

…after accounting for data snooping bias, technical analysis does not reliably offer value as a standalone market timing method in any of the 49 MSCI country equity markets.

…several simple tests refute a belief that the past relative behavior of QQQQ and IWM reliably predicts reversion in their near-term future relative behavior.

…momentum trading strategies generally offer significantly positive alpha for large-capitalization U.S. stocks, but the strategies may not work during bear markets.