Friday, March 14, 2008
Eric Falkenstein Is Back!
Mahalanobis was one of my favourite blogs till some legal dispute expulsed Eric from the blogosphere. Now he is back in Falkenblog, clear and focused as ever. He uncovers the archetypical stat-arb strategy as a mean reversion using daily horizons: past day's returns to determine winners and losers, hold for a day. What is really neat is it highlights that trades that work are often quite simple. It's always funny to see that a trade of going-long-losers-and-short-winners ("pairs"), is often managed by a PhD in math.
(Eric does not articulate it, but it follows that a trained monkey could do it, and probably better. For peanuts.) The illustration is from a monkey site, which observes that (sexual, business) partners are compatible when:
(1) There is no serious wounding,
(2) none of them monopolizes food,
(3) none of them shows signs of depression,
(4) the dominance-subordination relationship between the two is unequivocal.