The highlight of the book is the following statement : Any model should consider the following : Transaction Costs, Risk, Return, Market Efficiency and the objective of a investment strategy should be minimize first two, maximize third and work around the fourth. Liquidity and Taxes are the additional elements to make any model realistic. Coming back to what the book is all about, It is about Alpha, a term used to represent , excess of benchmark returns generated by a fund manager.

Couple of folks have emailed me to post the link of the article that I was mentioning in one of my previous post. The document attached with this post is perhaps a remarkable view from a person who understands both sides of the world, Fischerian and Bayesian, and proposes an alternative view for design inference. One can’t speed read this document. The article needs to be read slowly to understand it thoroughly…It is certain to make any reader wonder about the effective use of stats for drawing inference

Via Derivatives Strategy - Dec'97: What do you think of value-at-risk? NT: VAR has made us replace about 2,500 years of market experience with a co-variance matrix that is still in its infancy. We made a tabula rasa of years of market lore that was picked up from trader to trader and crammed everything into a co-variance matrix. Why? So a management consultant or an unemployed electrical engineer can understand financial market risks.

Recently, I stumbled on to an article which had a debate between Fischerian approach Vs Bayesian approach for design inference. According to the author, both had drawbacks when dealing with events with small probabilities. I became curious to know the bayesian side of things. My work in the past few years did make me use Fischerian approach in many forms..But What about Bayesian world ? Except the famous MontyHall problem and few other general examples, I had not read or understood clearly , how a bayesian approach could be put to real use.

Here is a firm which is using Reverse Law of Large Numbers (RLLN) for trading. Link : Investments Mr Kelly’s work is all about what happens when the size of the sample is decreasing instead of increasing. He has recently turned his attention to the credit crunch, and in particular to how the RLLN affects the “balance of expectations” in financial markets.