Harry Markowitz: An Appreciation
Harry Markowitz passed on June 22, 2023, at age 95. Dr. Markowitz was a unique person who created much of the field of financial economics and was a grandfather of behavioral economics. Chaired Professor of Finance at Baruch College, an IBM Executive Vice President when he was President of The American Finance Association, and later the Head of Research at Daiwa Securities Trust Company, Harry shared the Nobel Prize in Economics with his friend and protégé William F. (Bill) Sharpe, and Merton Miller. The Markowitz monograph, Portfolio Selection, Cowles Foundation monograph number 16, is regarded as one of the definite works in portfolio theory. It was the first true quantitative analysis of portfolios.
Why should forecasters care about Harry Markowitz? Harry’s portfolio construction process required three inputs; models of expected returns, covariances, and portfolio constraints. Analysts’ earnings forecasts, revisions, and the direction of revisions (breadth) are key inputs to expected returns modeling. Time series models have been used to forecast expected returns, often combining analysts’ and time series models, and models of covariance. Furthermore, the Markowitz portfolio returns were subjected to his Data Mining Corrections test to statistically “verify” that the expected returns model’s portfolio return did not occur by chance. Did we use only data available to “the little man inside the computer” was Harry’s question. Did we get luck, is Harry’s second question. How much future outperformance could be expected, as Harry’s third question. His fourth question was what have you done for me lately. Model parameters should be re-estimated over time and models enhanced. Does the original model still work, after 20-30-years, and have the enhancements maintained their statistical advantages over previous model estimations?
Take a moment to learn more about Harry, his work and his life in my tribute to Harry Markowitz posted in two parts:
https://wilmott.com/harry-markowitz-an-appreciation-part-i/
https://wilmott.com/harry-markowitz-an-appreciation-part-ii/