QUESTIONS

1. What is the extent and purpose of human intervention in a quantitative investment management process?
2. How are the methodologies utilized in economics different from those employed in the physical sciences?
3. What is the common objective of all quantitative processes?
4. What are the steps in the process for converting quantitative research into an implementable trading process?
5. What is meant by “data snooping”?
6. Why would it be prudent to test a quantitative model before it is implemented against an artificial data set formed from independent and identically distributed returns?

^* Parts of this chapter are adapted from Frank J. Fabozzi, Sergio M. Focardi, and K. C. Ma, “Implementable Quantitative Research and Investment Strategies,” Journal of Alternative Investments 8, no. 2 (2005): 71-79.

¹ David Leinweber, “Is Quantitative Investing Dead?” Pensions & Investments, February 8, 1999.

² For a modern presentation of the status of market efficiency, see M. Hashem Pesaran, “Market Efficiency Today,” Working Paper 05.41, Institute of Economic Policy Research, 2005.

³ Andrew Lo, “The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective,” Journal of Portfolio Management 30 (2004): 15–29.

⁴ Milton Friedman, Essays in Positive Economics (Chicago: University of Chicago Press, 1953).

⁵ The same considerations apply to other scientific domains ranging from biology, medicine, ecological studies, and so on. Our focus here is economics.

⁶ Rosario N. Mantegna and H. Eugene Stanley, An Introduction to Econophysics: Correlations and Complexity in Finance (Cambridge: Cambridge University Press, 2000).

⁷ See, for example, Stephen A. Ross, “Survivorship Bias in Performance Studies,” and Andrew Lo, “Data-Snooping Biases in Financial Analysis,” both appearing in Proceedings of Blending Quantitative and Traditional Equity Analysis (Charlottesville, VA: Association for Investment Management and Research, 1994).

⁸ Lo, “Data-Snooping Biases in Financial Analysis.”

⁹ Christopher K. Ma, “How Many Factors Do You Need?” Research Paper #96-4, KCM Asset Management, Inc. (2005 and 2010).

¹⁰ See Keith Brown, W. Van Harlow, and Seha M. Tinic, “Risk Aversion, Uncertain Information, and Market Efficiency,” Journal of Financial Economics 22, no. 2 (1988): 355–386.

¹¹ See Werner F. DeBondt and Richard Thaler, “Does the Stock Market Overreact?” Journal of Finance 40, no. 1 (1985): 793–805.

¹² See K. C. Ma, “Preference Reversal in Futures Markets,” working paper, Stetson University, 2010.

¹³ See Josef Lakonishok, Andrei Shleifer, and Robert W. Vishny, “Contrarian Investment, Extrapolation, and Risk,” Journal of Finance 49, no. 5 (1994): 1541–1578.

¹⁴ See K. C. Ma, “How Many Factors Do You Need?” Stetson University, 2005 and 2010.

¹⁵ See, for example, Russell H. Fogler, “Investment Analysis and New Quantitative Tools,” Journal of Portfolio Management (1995): 39–47.

¹⁶ Ma, “How Many Factors Do You Need?” 2005 and 2010.

¹⁷ Fischer Black, “Estimating Expected Return,” Financial Analysts Journal 49, no. 5 (1993): 36–38.

¹⁸ K. C. Ma, “Nonlinear Factor Payoffs?” Research Paper #97-5, KCM Asset Management, Inc., 2010.

¹⁹ Richard R. Roll, “A Mean/Variance Analysis of Tracking Error,” Journal of Portfolio Management 18, no. 4 (1992): 13–23.

²⁰ See Ma, “Nonlinear Factor Payoffs?”