Arguably the greatest fear that system traders and professional sports bettors face is the fear their system is no longer profitable. Rather than making positive expected value bets, they're actually gambling into losing situations. There might have been profitable patterns during the tested time period, but there are no guarantees that the pattern will repeat itself in the future. The patterns might even be random, and we're just drawing non-existent connections.
The future is uncertain, and that's what sports bettors and system traders have to face. This uncertainty is why most people can't gamble or trade for a living. The professionals are wagering that any loss from using a negative system will be offset from the wins from a positive system.
Zerohedge just linked an article from Innovative Quant Systems and sums up some of the uncertainty about using a system based on momentum, value, balance sheet, improving financials, and sentiment:
Observations:
- One-Week factor persistence for very few factors in the past, but persistence is now realized for all 5 factor categories!
- Four-Week and Eight-Week factor persistence was positive in the past, but now they are negative!
- Improving Financials is expected to have longer-period persistence, which it consistently had at four-week and eight-week, but not recently.
- Momentum does not have persistence over long periods, and wouldn't expect it to.
- Value is expected to have persistence over long periods, and did so in the past, but not recently.
Conclusions:
Quantitative weighting schemes need to look back at the past to help forecast the future, with the assumption that persistence exists. With negative persistence recently, the better plan is to weight factors opposite what has performed well by incorporating the persistence information above into the process. Based on the results above, shorter-term trading models would have performed well since June 2007, while longer-term models would have performed better previously.
Leave a comment