Quant Mashup - Factor Wave
Intro to Possible New Book [Factor Wave]
Quantitative Trading for Non-Quantitative Traders This title might seem like a contradiction. You might think that non-quantitative traders are incapable of quantitative trading. This isn’t true. They might not be able to discover quantitative insights or read scholarly papers but they can
- 7 years ago, 8 Sep 2016, 02:33pm -
Interview With Artur Sepp: Part Two [Factor Wave]
This is the second and concluding part of our interview with Artur Sepp. Q: If you had an account of $100k, what would you trade? A: Well, if I had $100k I would manage it using the three strategies. The core strategy is based on the dividend growth. I would be very conservative with the companies I
- 7 years ago, 14 Jul 2016, 11:20pm -
Interview With Artur Sepp [Factor Wave]
Artur Sepp is a rare example of a quant who combines excellent technical skill with a practical understanding of markets. If you can't learn from his presentations the fault is more likely to be yours rather than his. He recently agreed to do an interview for us. Here is the first part. Q: What
- 7 years ago, 11 Jul 2016, 12:09pm -
Summer, Winter and the Volatility Premium [Factor Wave]
A member of our slack channel recently asked if there was an equivalent of "sell in May" for volatility trading. Does the volatility premium, the difference between implied volatility and the subsequent realized volatility, differ during summer and winter months? To test this idea for the
- 7 years ago, 6 Jun 2016, 10:44am -
A Few Little Links [Factor Wave]
I'm currently working on three things: a VIX option trading strategy, a piece about how factors relate to earnings announcements and a Kelly criterion type thing for options. But none is particularly close to being done. So I thought i would post a few links to articles that I found
- 7 years ago, 31 May 2016, 07:15pm -
Relationships between Factors [Factor Wave]
It is impossible to obtain pure factor exposure. All stocks are exposed in some way to all factors. Further, the factors are all inter-related so by trying to obtain exposure to one factor in particular you will tend to get a certain type of exposure to the other factors. Very broadly • Value has
- 8 years ago, 16 Dec 2015, 09:22pm -
Attention and Acceleration [Factor Wave]
One of our readers, Corey Hoffstein, told me about an interesting paper, “Investor Attention, Visual Price Pattern, and Momentum Investing”, by Li-Wen Chen and Hsin-Yi Yu. Their basic idea is that investors are drawn to stocks that have attention grabbing behavior. And the thing that most grabs
- 8 years ago, 10 Dec 2015, 04:35pm -
Factors in Other Products [Factor Wave]
Most of what I’ve written about have been equity factors. But factors, persistent price predictors, apply to other investments as well. FactorWave will also offer analyses in volatility, equity options and commodity futures. Volatility Equity volatility (tradeable through the VIX) displays two
- 8 years ago, 4 Dec 2015, 12:55pm -
Reversals and Momentum [Factor Wave]
I’ve recently written a few posts about the persistency of cross-sectional momentum. But it seems that eventually stocks that go up have to come down. Not only is this somewhat intuitive, but the existence of stock price reversals is also well documented. But actually momentum persistence and
- 8 years ago, 1 Dec 2015, 01:36pm -
Persistent Momentum [Factor Wave]
Somewhat related to the idea of acceleration that I have been writing about recently, is the concept of persistent momentum. That is, do stocks that have performed well over several periods, beat those that have done well for only one period? This idea was tested by Hong-Yi Chen, Pin-Huang Chou and
- 8 years ago, 27 Nov 2015, 01:50pm -
Migration from Good Factor Exposures [Factor Wave]
There are a number of ways to become more confident in the idea of factor investing. The simplest is to just compare the results of factor portfolios to those based on other methods. This will show outperformance but it won’t give us a reason for the outperformance. So anything that can give us
- 8 years ago, 24 Nov 2015, 01:28pm -
And Even More Evidence of Acceleration being Predictive [Factor Wave]
In the last two posts I wrote about acceleration, where returns over consecutive periods are increasing. I’ve received several emails about the idea. These investors (with about 80 years of experience between them) really like the concept. It resonated with the way they saw the world. When looking
- 8 years ago, 20 Nov 2015, 12:14pm -
Acceleration and Momentum [Factor Wave]
The momentum factor has been extensively studied. We know it predicts outperformance both in the absolute and in the cross section. Momentum has been studied in many markets and over extensive time periods. But a recent interesting paper instead looks at whether the change of momentum is a useful
- 8 years ago, 17 Nov 2015, 11:47am -
Why do Small Stocks Outperform? [Factor Wave]
And let’s be completely straight here: they do. Occasionally we hear about “The disappearance of the X factor”. This is just people mistaking the transient nature of the factor outperformance for a permanent decline. People seem to have a very strong tendency to confuse short term performance
- 8 years ago, 22 Oct 2015, 04:38pm -
Risk is Still Not a Mathematical Concept [Factor Wave]
I wrote last week that many different measures of risk can be used to demonstrate that low risk stocks outperform high risk stocks, and illustrated this by sorting stocks according to the Hurst exponent. Today we are going to offer another example of this by using entropy as the measure of risk. The
- 8 years ago, 30 Sep 2015, 08:06pm -
Risk is not A Mathematical Concept [Factor Wave]
There is plenty of evidence that stocks with low volatility have better subsequent performance. There is also plenty of evidence that stocks with low beta outperform. Other studies have shown that low downside deviation and skewness are also predictive of good returns. None of these measures are
- 8 years ago, 24 Sep 2015, 09:38am -
Interview with Dr Ernest Chan [Factor Wave]
Dr Ernie Chan does something difficult well: he explains quantitative trading ideas to retail traders without over-simplifying them. He has written two books," Quantitative Trading:How to Build Your Own Algorithmic Trading Business" and "Algorithmic Trading: Winning Strategies and
- 8 years ago, 16 Sep 2015, 08:32pm -
Is Technical Analysis Folk Medicine? [Factor Wave]
I've been thinking more about technical analysis. Not so much how to do it, but more about what it actually is. Some of it can be tested scientifically, but a lot can't (for more on this distinction refer to the excellent book by David Aronson, "Evidence-Based Technical Analysis:
- 8 years ago, 11 Sep 2015, 11:06am -
Benford's Law [Factor Wave]
Benford's Law states that in many naturally occurring groups of numbers, the small digits are seen disproportionately often. This is often applied to the leading digits of data but it is more general than that. This was first noticed by the astronomer Simon Newcomb (who also should be famous
- 8 years ago, 4 Sep 2015, 09:49pm -
Institutional Trading as a Predictor [Factor Wave]
It seems reasonable that institutional trades could influence stock returns. Any large trades will move prices. In fact, a fairly common trading strategy is to try to detect the presence of large institutional trades in order to piggy-back on the flow. Also, large institutions have access to a lot
- 8 years ago, 3 Sep 2015, 10:01pm -
Are Spikes Predictive? [Factor Wave]
Yesterday I looked at stock market returns in the week and month after a large daily decline and found that it is usually a good time to buy more equities. Especially because, as long-term investors, our strongly held prior is that equity markets appreciate over time. But what about spikes? Do large
- 8 years ago, 28 Aug 2015, 12:27pm -
Extreme Moves as Market Predictors [Factor Wave]
The last week has been interesting. Not always fun but at least always interesting. Extreme moves in the market are something of a double-edged sword when it comes to learning. First, extreme moves are "special". Obviously so in terms of frequency, but also in terms of the investor
- 8 years ago, 27 Aug 2015, 12:37pm -
Behavioral Analysis of Technical Analysis [Factor Wave]
I recently wrote about the link between quantitative analysis and technical analysis (deeply upsetting some people in the process). Today I'm going to write about the link between behavioral finance and technical analysis. But possibly not in the way you will be expecting. It is common for
- 8 years ago, 25 Aug 2015, 11:09am -
Moods and the Market [Factor Wave]
At the start of the week I wrote a post about the effect of weather and the markets. Leo Cheng thought (quite reasonably) that this might just be data mining. If you look at enough things, some will appear to have an influence on the market just by chance. I've done a little more reading and I
- 8 years ago, 21 Aug 2015, 10:32am -
The Gamblers' Fallacy [Factor Wave]
This is somewhat based on an an article I wrote for the sadly departed "Active Trader" magazine but is more directly spurred by a conversation I had with a reader about my last post. Her point was that by buying dips we are just engaging in a classic Martingale, buying when things go
- 8 years ago, 20 Aug 2015, 10:31am -
Technical Analysis or Quantitative Analysis? [Factor Wave]
Yesterday I had a coffee with a person I have known for 20 years. He has worked as a quantitative analyst, a trader and a finance professor for at least as that long. He is one of the most knowledgeable people I know. When he says something it is worth listening. What he said was (roughly), "
- 8 years ago, 19 Aug 2015, 10:17am -
The Effect of the Board of Directors [Factor Wave]
The Quality factor is a composite measure designed to identify companies with the characteristics that typically lead to success. It is particularly useful to identify "value traps": companies which are cheap by current metrics but are losing money. I wrote a little about quality here.
- 8 years ago, 18 Aug 2015, 12:27pm -
Weather and the Markets [Factor Wave]
It should be fairly obvious to anyone who has been involved with investing for any time, that traders decisions are heavily influenced by their mood. Actually, some interesting recent research has shown that people generally make decisions intuitively before using their conscious thought processes
- 8 years ago, 17 Aug 2015, 12:25pm -
Some More on Stock Splits [Factor Wave]
About a month ago I started to answer a reader's question about stock splits. I was initially diverted by the "low price effect" and then forgot to revisit the topic. In addition to the fact that a split reduces the price, it is also a distinct event and we can study the dynamics of
- 8 years ago, 14 Aug 2015, 07:27pm -
Anomalies and Earnings [Factor Wave]
Professional investors seem to make a different set of errors than amateurs. In particular, i think they can sometimes take too little risk. For example, many traders try not to hold positions overnight, even though that is when most stock returns accrue. Similarly, a lot of professional option
- 8 years ago, 13 Aug 2015, 10:39pm -
War and the Markets [Factor Wave]
This post is based on an article I wrote for Active Trader Magazine. "Buy to the sound of cannons, sell to the sound of trumpets." -Lord Nathan Rothschild, 1810 The Rothschilds were one of the world’s richest families and formed a modern financial dynasty. In 1815 they were rumored to
- 8 years ago, 11 Aug 2015, 11:32am -
The January Effect in International Markets [Factor Wave]
In the second post on the price factor, Leo Cheng commented that "I (sic) remember reading somewhere that the low price stock January effect is due to fund managers taking extra risk in January. Their bonus is usually calculated every reporting year (December) and the best way to begin the year
- 8 years ago, 6 Aug 2015, 09:51am -
Turn of the Month Effect in Commodities [Factor Wave]
I've been thinking about applying factor analysis to commodity futures. People have studied this idea but commodity factors have not been studied to the same degree as equity factors. This is to be expected. Stocks are parts of companies and there are many commonalities between the operations
- 8 years ago, 5 Aug 2015, 11:45am -
Do the VIX Futures Know More Than the S&P 500? [Factor Wave]
A while ago I wrote a post, "Does the VIX Know More Than the S&P 500?", and concluded "when the VIX and the S&P 500 are both up on the day sell the stocks, either through the futures of an ETF. " An astute reader, Leo Cheng, pointed out that the VIX index has a certain
- 8 years ago, 3 Aug 2015, 12:43pm -
Political Contributions and Stock Returns [Factor Wave]
We are now about a year and a half away from the next presidential election. This means that the campaigning has been underway for over a month. Quite why the electioneering needs to last for a third of a presidential term is beyond me, but that might just be because I am a closet communist
- 8 years ago, 30 Jul 2015, 10:14am -
Trading the VIX over the Fed Announcement [Factor Wave]
"Buy the rumor, sell the fact" is an over-used phrase traders say to describe the way the equity markets get excited by future events then lose steam when the event actually happens. Because the VIX is strongly negatively correlated with the equity markets, this could be changed to
- 8 years ago, 29 Jul 2015, 01:14pm -
The Information from Insiders [Factor Wave]
One of the things that “everyone knows to be true” is that the trades of company insiders convey valuable information. But is this really true? And are some types of trades more informative than others? If you can get hold of the relevant data, this is the sort of question that is very amenable
- 8 years ago, 29 Jul 2015, 11:03am -
The Media and Stock Returns [Factor Wave]
I recently had a disagreement with a trader friend. He said CNBC has become a waste of time to have on. I said it has always been a waste of time to have on. His point was that there are times when has been able to give him ideas about what stocks to follow. He thought it was self-evident that
- 8 years ago, 27 Jul 2015, 11:43am -
The Mechanics and Dynamics of a Short Squeeze [Factor Wave]
In a recent post I discussed how the short borrow rate could be used as a predictor of future stock returns. This prompted a reader to ask if the analysis had taken short squeezes into account. This is a good point. Because of the mechanics of short selling it is sometimes not possible to hold short
- 8 years ago, 24 Jul 2015, 06:56pm -
Carry: An Investing Framework [Factor Wave]
People generally compartmentalize their knowledge. They try to think of things in terms of categories and frameworks rather than remember a bunch of disconnected facts. For example, chemists think of the world in terms of interactions between elements, astrologists (a.k.a stupid people) think of the
- 8 years ago, 23 Jul 2015, 10:44pm -
Short Rates as a Predictor of Stock Returns [Factor Wave]
In order to sell a stock short you first need to borrow it from someone else. The way that this typically happens is that your broker takes it from another clients account and loans it to you. You can then sell it to someone else. Although this means you end up with cash in your account, individuals
- 8 years ago, 21 Jul 2015, 10:03am -
More on the Price Factor [Factor Wave]
Earlier this week I was starting an investigation into stock splits and I found out about the price factor: the fact that low priced stocks outperform high priced stocks. This is a very useful finding if it is robust so it needs more investigation. At the end of that blog post I wrote: "This
- 8 years ago, 20 Jul 2015, 10:00pm -
The Price Factor [Factor Wave]
Stock splits lower the stock price. But what does that mean? Most straightforwardly, do lower price stocks perform better than higher priced stocks? Soosung Hwang and Chensheng Lu examined this and published their results in the paper, "Is Share Price Relevant?". They used
- 8 years ago, 17 Jul 2015, 11:04pm -
A New Factor: Illiquidity [Factor Wave]
Value, size and low volatility "anomalies" have been studied for decades. Momentum has only been recently recognized by academics but a lot of practitioners have been firm believers in it for many years. Quality is the most recent of the well accepted factors but the components that go
- 8 years ago, 15 Jul 2015, 11:45am -
Momentum: Absolute or Relative? [Factor Wave]
There are two completely different ways to think about momentum: absolute and relative. At FactorWave we are largely concerned with relative (or cross-sectional) momentum. We know that stocks with positive momentum tend to outperform thse with negative momentum. So if we have a choice of two stocks:
- 8 years ago, 13 Jul 2015, 12:54pm -
The Comfort of Following the Index by Saarthak Gupta [Factor Wave]
FactorWave is built on the premise that factors are important investing. And if these factors are so important, then we should be asking ourselves why everyone doesn't seem to use them. If I may briefly invoke the specter of Rational Economic Theory, in an efficient market, these factors
- 8 years ago, 8 Jul 2015, 11:47am -
Does the VIX Know More than the S&P 500? [Factor Wave]
It is commonly believed that option markets are “smarter” than equity markets. There could be several reasons for this. Trading options is mathematically complex. It involves estimating volatility, solving differential equations and devising hedging algorithms. It is true that most professional
- 8 years ago, 1 Jul 2015, 10:21am -
Weekend Effect [Factor Wave]
This is a phenomenon in the equity markets where the market rises over the weekend. There is still some debate over the existence and persistence of this effect but, as long as we carefully define exactly what we mean it is easy to test this idea. We are going to examine the S&P 500 since 1990
- 8 years ago, 29 Jun 2015, 07:06pm -
Stops IV: The Trailing Stop [Factor Wave]
A reader asked if there was any real difference between using a fixed stop at a given distance from our entry price or a trailing stop which we move so it stays a certain distance from the highest amount the investment has made. A trailing stop is a very comforting strategy. It seems to protect us
- 8 years ago, 24 Jun 2015, 12:46pm -
The Probability of Something that has Never Occurred [Factor Wave]
An astute reader of the post on Risk pointed out that one of the reasons risk management is hard is because it often involves estimating the chance of something that has never happened before. For example, what is the probability of the US defaulting on its debt or of Apple going bankrupt? Sometimes
- 8 years ago, 23 Jun 2015, 07:34pm -