Comments on: Shadwick to Quants: “Financial models should come with health warnings!” http://allaboutalpha.com/blog/2008/03/09/shadwick-to-quants-financial-models-should-come-with-health-warnings/ Hedge funds, portable alpha, 130/30 and alpha-centric investing Fri, 19 Mar 2010 07:52:26 +0000 http://wordpress.org/?v=abc hourly 1 By: Jake http://allaboutalpha.com/blog/2008/03/09/shadwick-to-quants-financial-models-should-come-with-health-warnings/comment-page-1/#comment-96588 Jake Wed, 09 Apr 2008 19:41:48 +0000 http://allaboutalpha.com/blog/2008/03/09/shadwick-to-quants-financial-models-should-come-with-health-warnings/#comment-96588 Excellent post. I heard an earlier version in the form of: "Correlation does not equal Causation". But try telling that to a rich dot-commer that wants to invest his money in a hedge fund that has been pronounced worthy by a fund of funds with a fancy name... Excellent post. I heard an earlier version in the form of: “Correlation does not equal Causation”. But try telling that to a rich dot-commer that wants to invest his money in a hedge fund that has been pronounced worthy by a fund of funds with a fancy name…

]]> By: Ranjan http://allaboutalpha.com/blog/2008/03/09/shadwick-to-quants-financial-models-should-come-with-health-warnings/comment-page-1/#comment-90557 Ranjan Thu, 13 Mar 2008 03:38:06 +0000 http://allaboutalpha.com/blog/2008/03/09/shadwick-to-quants-financial-models-should-come-with-health-warnings/#comment-90557 This is a great post and a good reminder of one of the biggest risks in the finance industry - model risk. I would rate liquidity risk and model risk as the two risks which are mishandled the most currently by firms. An excellent(but slightly technical)read on model risk is "Inconsistency & Interest Rate Model Risk" by Anthony Di Silvestro (it was his Masters thesis in Mathematics at McMaster University written in 2004). This is a great post and a good reminder of one of the biggest risks in the finance industry – model risk. I would rate liquidity risk and model risk as the two risks which are mishandled the most currently by firms.

An excellent(but slightly technical)read on model risk is “Inconsistency & Interest Rate Model Risk” by Anthony Di Silvestro (it was his Masters thesis in Mathematics at McMaster University written in 2004).

]]> By: Walt French http://allaboutalpha.com/blog/2008/03/09/shadwick-to-quants-financial-models-should-come-with-health-warnings/comment-page-1/#comment-89817 Walt French Mon, 10 Mar 2008 22:03:09 +0000 http://allaboutalpha.com/blog/2008/03/09/shadwick-to-quants-financial-models-should-come-with-health-warnings/#comment-89817 heck, every example cited says that the problem is sloppily conceived models. Not all financial models are expressed mathematically or on computers. "Value stocks out-perform over time" is a model. It's too vague for most purposes, but at least it's usable as is. And just as a flight simulator and a build-from-a-kit plastic toy are both "models" for a 777, a model has to be used with a bit of understanding about what it can do, and what it can't. I'd say, the problem is not with modeling -- the Markowitz, Sharpe and Black-Scholes models are famous for having advanced our thinking -- but rather, with people who believe that a few numbers with lots of decimal places are a substitute for thinking. heck, every example cited says that the problem is sloppily conceived models.

Not all financial models are expressed mathematically or on computers. “Value stocks out-perform over time” is a model. It’s too vague for most purposes, but at least it’s usable as is.

And just as a flight simulator and a build-from-a-kit plastic toy are both “models” for a 777, a model has to be used with a bit of understanding about what it can do, and what it can’t.

I’d say, the problem is not with modeling — the Markowitz, Sharpe and Black-Scholes models are famous for having advanced our thinking — but rather, with people who believe that a few numbers with lots of decimal places are a substitute for thinking.

]]> By: Monday links: hidden assumptions « Abnormal Returns http://allaboutalpha.com/blog/2008/03/09/shadwick-to-quants-financial-models-should-come-with-health-warnings/comment-page-1/#comment-89772 Monday links: hidden assumptions « Abnormal Returns Mon, 10 Mar 2008 16:14:30 +0000 http://allaboutalpha.com/blog/2008/03/09/shadwick-to-quants-financial-models-should-come-with-health-warnings/#comment-89772 [...] “Hidden assumptions should give rise to “health warnings” on quantitative models.” (All About Alpha, NakedShorts) [...] [...] “Hidden assumptions should give rise to “health warnings” on quantitative models.” (All About Alpha, NakedShorts) [...]

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