2025/12/09 by Daniel Egger, Egger, Daniel, Jacob Vestal +1 · 1 voice
Decision Sciences · Economics, Econometrics and Finance · Mathematics · #Complex Systems and Time Series Analysis #FOS: Economics and business #FOS: Mathematics #Financial Markets and Investment Strategies #Probability (math.PR) #Risk Management (q-fin.RM) #Stock Market Forecasting Methods #math.PR #q-fin.RM
paper · pdf · doi:10.48550/arxiv.2512.08851
openalex publication_date 2025/12/09 · arxiv published 2025/12/09 · arxiv updated 2025/12/09 · openalex created_date 2025/12/11 · openalex updated_date 2026/07/28
Hoeffding's Inequality provides the maximum probability that a series of n draws from a bounded random variable differ from the variable's true expectation u by more than given tolerance t. The random variable is typically the error rate of a classifier in machine learning applications. Here, a trading strategy is premised on the assumption of an underlying distribution of causal factors, in other words, a market regime, and the random variable is the performance of that trading strategy. A larger deviation of observed performance from the trader's expectation u can be characterized as a lower probability that the financial regime supporting that strategy remains in force, and a higher probability of financial regime change. The changing Hoeffding probabilities can be used as an early warning indicator of this change.