Getting Financial Predictions Right

David Bailey is a leading figure in high-performance scientific computing and computational mathematics, with over 200 published papers and six books. In the field of mathematical finance, his best-known paper is “Pseudo-mathematics and financial charlatanism: The effects of backtest overfitting on out-of-sample performance.” Bailey has received awards from the IEEE Computer Society, the Association for Computing Machinery, the American Mathematical Society and the Mathematical Association of America. In his talk, David looks at these points…

1. AI and other software tools are being utilized extensively in the world of finance.
2. However, “backtest overfitting” (statistical overfitting of market data) remains a challenge.
3. We illustrate the dangers of backtest overfitting in the design of stock funds and in market forecasting.
4. Considerable care must be taken when using AI methods, for finance or anything else, to ensure they are based on sound statistics.