I have been a mathematics fan for a long time. However, most of what I have studied is experimental in terms of quantum sciences or the natural phenomenons. It is easier to make variables there, in terms of observing them and then assigning them values. I have been trying to take mathematics and use it in stock exchanges to be able to predict things and make actual investments since I am very keen on doing that actual investments part.
I found a book called "A Mathematician Play the Stock Exchange" and I feel like that would be a good start. Does anyone have any recommendations that could help me move forward in the practical applications of the mathematics in stock change?
Hi,
As usual it boils down to trying to bridge the mathematics theory and the practice of it, in this case finance. Here are some possible books to check, which could very well bridge the gap:
1. http://www.quantstart.com/articles/quantitative-finance-reading-list
2. http://www.worldscientific.com/worldscibooks/10.1142/6009
3.http://www.amazon.com/Concepts-Practice-Mathematical-Finance-Mathematics/dp/0521514088
4. http://www.amazon.com/Mathematics-Finance-Introduction-Engineering-Undergraduate/dp/0857290819
I recommend you read the following book by John J. Murphy:
John J. Murphy. Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications, New York Institute of Finance; SUB UPD EX edition, 1999). 576 pages.
Comments by readers:
John J. Murphy has now updated his landmark bestseller Technical Analysis of the Futures Markets, to include all of the financial markets.
"If one could read only one book on technical analysis, this should be the one." --Knight-Ridder Financial Products and News (on the first edition, Technical Analysis of the Futures Markets, 0-13-898008-X)
Apparently your plan is to use mathematical techniques to forecast future stock returns, and then to profitably exploit these forecasts. It is not clear whether, and to which extent, this is possible. Although there are many investors who believe in, and apply, technical analysis (this is what it boils down to), there are some important caveats:
1) If the market is informationally efficient with respect to the information you plan to use, you will not be able to beat the market.
2) Even if the market is not informationally efficient: If we take the return of a passive strategy (i.e., buying and holding "the market" as proxied by an appropriate index) as a benchmark or average, and even assuming transaction costs away, for every dollar that earns an above-average return there must be a dollar earning below average. Thus, at most half of the investors can beat the market.
3) Technical analysis often implies frequent portfolio rebalancing and thus incurs high transaction costs
4) There are thousands of investors out there who try to outguess the stock market, many of them professionals who devote a lot of time and money to their investment strategies. Do you have good reasons to believe that you are better than them?
5) There is little evidence that professionals such as fund managers can systematically beat the market.
In summary, most investors, and certainly most retail investors, probably fare better with a passive strategy.
you are right, applying mathematics to finance/investment is probably not the most exciting exploitation of mathematics. only the successful guys in mathematics itself can be successful in the application of mathematics in finance or elsewhere.
There is only way to find out if I am competent enough to use mathematics in the stock exchange and I do intend to test it.
As for the exploitation of mathematics, I am very fascinated by the idea of seeing if math is bigger than a man made system and yes use it to get financial advantage.
Good luck with that. But keep in mind that you are certainly not the only one applying math, and that you are competing with (among others) high frequency traders who have sophisticated models and enormous computing power.
Peter Bernstein's books are worth a read especially "Against the Gods: the remarkable story of risk". William.
I am also very influenced now by Gerd Gigerenzer's huge range of work of which "Gut Feelings" (2007) is a nice start. But he has headed up a research institute at Max Plank, Berlin, for quite a while now and has produced a massive body of work. Gegerenzer certainly gives an alternative (if not better) view than the usual Kahneman and Tversky view which tend to dominate current discussion (and a little too much in my view). William.
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