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Mathematicians Call Out Financial Fraud

The Financial Times drew attention in April to a paper in the Notices of the American Mathematical Society that makes the case that the vast majority of claims made for quantitative investment strategies are false.

In "Pseudo-Mathematics and Financial Charlatanism: The Effects of Backtest Overfitting on Out-of-Sample Performance," David H. Bailey, Jonathan M. Borwein, Marcos Lopez de Prado, and Qiji Jim Zhu argue that by failing to apply mathematical rigor to their methods, many purveyors of quantitative investment strategies are misleading clients.

The Financial Times' Stephen Foley welcomes the mathematicians' critique: 

Raising the issue is necessary for raising the bar. Too many investment managers and advisers, it is claimed, are purveyors of false positives, getting rich on statistical flukes. If their methodologies do not improve in line with the improvements in academic thinking about backtesting and overfitting, then they really will deserve to be called out as frauds.

Read the story.

Start Date: 
Wednesday, May 7, 2014