How Geopolitical Shock Waves Influence Model Risk and Out‑of‑Sample Performance
Research preview
Recent violent clashes in the West Bank involving European diplomats and local settlers have reminded traders that political risk can materialize suddenly and dramatically. When markets react to such events, the statistical properties of price series can shift, exposing weaknesses in models that were calibrated on calm data. Understanding how to guard against over‑fitting and to evaluate true out‑of‑sample error becomes essential for any quantitative strategy that trades around geopolitical news. The danger of fitting noise in a volatile environment Statistical models that contain many explanatory variables are prone to capture random fluctuations rather than genuine relationships....
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