testing

The BREXIT issue may be the trade of the year. What does that mean and why give it this view?  1. This is a big event - Not only will this have huge impact on Great Britain and its place in the European and world economy, there will have a spill-over effect to the rest of the EU. This is the type of event that will shift rare event expectations and increase tail risks. 2. There is a specific date when uncertainty will be resolved. There is not an issue of when it will occur. We know the vote date. 3. The probability of the vote can be tracked and measured. Handicappers now say there is a 24% chance of an exit. The poll numbers look like it is very close. The risks of a bad outcome after June are still not clear, but the vote can be watched and given precision. 4. The market has already spoken that this is a big deal and talk is generating more interest. The IMF just stated that there will be severe global damage if the Brits leave.  5. Financial institutions will have to squar...

Systematic models are very useful and important for disciplined investing, but the percentage of the variation explained by most models in asset markets is relatively low especially over short horizons. The question for most managers, even quants, is determining how to deal with this percentage that is unexplained. There is no simple solution but applying a structural headwinds/tailwinds checklist may provide a good first pass for addressing the problem. A structural headwinds or tailwinds checklist groups or categorizes issues that may provide a tilt to returns. These tilts on expected returns may lead investors to make a tilt or base adjustment to asset class allocations. Instead of starting with a base allocation of zero, there could be a negative or positive base allocation. There could be more categories to this checklist, but these eight may get any discussion started. Some of these issues can be quantified, but we believe they often cannot explain short-term variation except...

It may seem that the world is gripped by terrorism, but there is a school of researchers who suggest that the world has gotten more peaceful and that violence is trending down. There certainly has been something of a "Long Peace" with no world conflicts in more than 70 years, yet it may be hard to draw conclusions on whether the trend is toward non-violence. Leave it to Nassim Taleb and his co-ahtor Pasquale Cirillo to provide some useful perspective on this issue with a math foundation. Employing the tools of extreme value mathematics with fat-tails distributions the authors provide some much needed analysis on this critical research topic. Their conclusion is that we just do not have enough data to draw any conclusions on the trends in violence around the world. It is fine to be hopeful, but there is little evidence to support a good news story. See their working paper, "What are the chance of a third world war?" and their paper " On the statistical properti...