Inside the Black Box: A Simple Guide to Quantitative and High Frequency Trading, 2nd Edition

CHAPTER 9

Research

Everything should be made as simple as possible, but not simpler.

—Albert Einstein

Research is the heart of quant trading. It is in large part because of well-designed, rigorous, and tireless research programs that the best quants earn their laurels. This chapter gives an overview of what research really means for black-box traders. It focuses mostly on research targeted at developing the alpha models of trading strategies. Research is also done with regard to risk models, transaction cost models, portfolio construction models, execution algorithms, and monitoring tools. Relevant research topics in these other areas will be mentioned as necessary, but the general principles from this section hold true throughout the black box.

The purpose of research is to scrutinize a well-conceived investment strategy. A strategy is a long-term course of action designed to achieve an objective, usually success or victory. In most applied settings, strategies are chosen from a limitless number of alternatives. One can find interesting examples in nearly every field: curing cancer, a baseball game, a war, a court case, or financial planning. In each case, one has many choices of strategy; so how is one chosen? In the case of quant trading, a strategy is chosen based on research, which has its roots in the natural sciences.

BLUEPRINT FOR RESEARCH: THE SCIENTIFIC METHOD

A characteristic shared among well-behaved quants is their adherence to the scientific method in conducting ...