Quant Mashup - AligrithmEmail summaries are back. Get the Quant Mashup delivered to your inbox every 1-3 days. Never more than one email per day. No spam and no sharing your address. Look for the email link in the header and sidebar. - Mike The Real IS→OOS Sharpe Haircut (Closed Form, Not "50%") [Aligrithm]Twelve commodity futures, three momentum windows and an intercept, ten years of daily closes: 444 coefficients on 2,520 rows. Jacquier, Muhle-Karbe, and Mulligan compute the fraction of the in-sample Sharpe ratio this linear book is expected to keep on new data. Their commodity case study puts that(...) A Trend Factor for the Crypto Cross-Section (and Its Overfit Tell) [Aligrithm]Fieberg, Liedtke, Poddig, Walker, and Zaremba build a weekly score from 28 technical indicators, buy the value-weighted top fifth of coins, and short the bottom fifth. From April 2015 to May 2022 that hedge earns 3.87% a week, t-statistic 5.19, annualized Sharpe ratio 1.94. They then rebuild the(...) Does Complexity Actually Help? (flagship) [Aligrithm]Buy-and-hold on the volatility-scaled US market earns an out-of-sample Sharpe ratio of 0.5494 from January 1940 to December 2020. The 12,000-feature timing model that Kelly, Malamud, and Zhou offer as evidence that performance rises with complexity earns 0.4851 on that same window. A ridge(...) Learning to Rank, the Original: Pairwise and Listwise Cross-Sectional Momentum [Aligrithm]You rebalance a long-short of NYSE names once a month, and you keep the top 100 and the bottom 100. The score's level never enters the book. A loss that matches next month's return, one name at a time, can land on the same average error and still hand you the opposite two names. Pairwise(...) Building a Statistically Valid Backtest: The Checklist Nobody Runs [Aligrithm]McLean and Pontiff record stock-portfolio predictors whose performance is 26% lower out of sample than in sample, and 58% lower after publication. Suhonen, Lennkh, and Perez look at 215 smart-beta strategies banks offered and find a median deterioration of 73% in the Sharpe ratio from the backtest(...) Polynomial Regression Bands With a Profit Factor Below One [Aligrithm]Gil Cohen fits second-, third-, and fourth-degree polynomial moving regression bands to Nasdaq-100 names from 2017 through March 2024, charges 0.3% on each fill, and names the four-degree model best. Table 3 puts the average net profit at 162.75 dollars per name. The abstract, the conclusion, and(...) Is Attention a Factor? WSB Herding, BERT Sentiment, and the Meme Confound [Aligrithm]Huang and Shum Nolan buy three names. Each month they take the tickers WallStreetBets mentioned most, keep a name only when the posts were majority bullish, and hold the equal-weight book for the next month. Regress that book's daily percent return on the market, size, value, and momentum(...) ML in the Cross Section: Avramov's Companion to the DDA3600 Spine [Aligrithm]On the non-microcap book, 0.50% times the Gu-Kelly-Xiu neural net's turnover of 0.869 costs 0.4345% a month. Its Fama-French six-factor alpha on that book is 0.312%. The ticket is larger than the alpha. Instrumented principal components, the linear model that lets betas move with firm(...) Information Theory for Traders: Entropy, Mutual Information, Channel Limits [Aligrithm]A feature that matches the sign of the next E-mini return on 4 days out of 5 leaves 0.722 bits of uncertainty about that sign. The part the feature removes is 0.278 bits of mutual information, out of the 1 bit in a fair coin. The binary channel that flips 1 transmitted bit in 5 has that 0.278 as its(...) Lead-Lag Is Multidimensional: Trade Price and OBI Predict Others' Midpoints [Aligrithm]The Euro Stoxx 50 future's trade price led the DAX future's midpoint on 99% of trading days from January to June 2021, and the lag that maximized the correlation was 100 microseconds. Bender, Cestonaro, and Schmidt measure that lead on 19 Xetra and Eurex instruments, across nine(...) Stat-Arb Is a Clustering Problem: Multi-View Spectral > Any Signal [Aligrithm]On S&P 500 names from 2000 to 2022, the best book in Raymond Leung's grid is multi-view co-regularized spectral clustering with 25 clusters, a plain long-short spread, and an Ornstein-Uhlenbeck entry and exit. After a 5 basis point charge on each leg at entry and again at exit, that book(...) Stop Using Pairwise Granger (causality upgrade) [Aligrithm]A pairwise screen of the 64-futures book, at a 5% level and five lags, expects 1,008 false links when every cross-link is null. That book is the one in the old article "Network Momentum as a Cross-Asset Factor," and the screen is the bivariate test the old article "Stop Using Pairwise(...) Moving Average Distance: The Technical Indicator That Passed the Cross-Section [Aligrithm]Divide a stock's 21-day moving average by its 200-day moving average. That is the whole signal, and it is about as retail as a signal gets. Avramov, Kaplanski and Subrahmanyam ran it across 13,828 US firms and 1,353,679 monthly returns from July 1977 through December 2018, and the(...) State-Dependent (In)Efficiency: Meta-Learning a Directional-Change Threshold [Aligrithm]Barak, Razmi and Mousavi report an out-of-sample Sharpe ratio of 1.34 against 0.59 for the best static version of the identical trading logic, on 50 crypto futures from January 2022 to January 2024, with a Ledoit-Wolf bootstrap p-value of 0.008 on the difference. The machine doing the work is a(...) Good vs Bad COVOL in Crypto: A Common-Volatility Tilt [Aligrithm]Pham, Han, Nguyen, Pham and Do build one index and then trade it backwards. In Section 5.4 they write that an RCI near zero marks "widespread panic selling and a potentially buying opportunity," and that exuberance at the top "can indicate a market peak and a potential selling(...) Trend Quality Near Settlement: A Kalshi State Variable, Not Alpha [Aligrithm]A 70.8% continuation rate looks like a trade. Greene sorts 4,061 Kalshi contracts by the quality of their price trend over the window from 30 to 12 minutes before close, and the top decile keeps moving in the trend's direction 70.8% of the time against 51.2% in the bottom decile. Ex-post(...) Do Intra-Bar Timestamps Carry Alpha? OHLC + Timing Features [Aligrithm]Bloomberg started selling the clock inside the bar. Not just the high price for the minute, but the second at which the high printed, the same for the low, the first and last trade times, condition-code tick counts, and a Bloomberg VWAP for the interval. Ruslan Tepelyan trained three neural networks(...) Piecewise-Linear Regime Identification (Interpretable, No Black Box) [Aligrithm]Fit a connected piecewise-linear trend to the Swiss Leaders Index with fifteen breakpoints and you get an in-sample R-squared of 0.954. Fit the same model to a driftless random walk of the same length and you get 0.966. I ran 200 of them. The noise wins at every single value of K, from zero(...) Stock-Bond Correlation: The Sign Flips and So Do Its Drivers [Aligrithm]A 50/50 stock-bond portfolio that earned its target return with moderate volatility before 2000 requires an 80/20 allocation after 2000 to maintain the same profile. That 30-point shift is not a style choice or a bet on equities. It is the portfolio adjustment needed to compensate for the stock-bond(...) Volatility Clustering in Bitcoin: Regime Persistence as a Forecast [Aligrithm]Bitcoin's volatility does not mix randomly across time. High-vol periods follow high-vol periods, low-vol stretches extend themselves, and the transition probabilities are stable enough to build a forecast from. Borrego Roldán's 2024 study quantifies this with hourly and daily data from(...) Crypto Isn't Structurally Alien: Roll/VPIN/Amihud Predict Distribution Shifts [Aligrithm]Easley, O'Hara, Yang and Zhang take five textbook microstructure measures, compute them on Binance one-minute bars for BTC, ETH, XRP, SOL and ADA over January 2021 to July 2023, and ask a random forest to call the sign of tomorrow's change in the return distribution. Two numbers carry the(...) FX Edge Lives in Other Markets (cross-asset series) [Aligrithm]A currency futures book built from other currency futures scores a Sharpe of 0.16. The same contracts, wired into a graph that also contains equities, bonds, and commodities, jump the FX sleeve to 0.66. That is Pu, Roberts, Dong, and Zohren, 64 futures, 2000 to 2022, volatility-targeted to 15%.(...) Does Complexity Actually Help? The Virtue-of-Complexity Autopsy [Aligrithm]Kelly, Malamud and Zhou opened their Journal of Finance paper by reporting out-of-sample market timing Sharpe ratio improvements "relative to market buy-and-hold" of roughly 0.47 per year, earned by a model with 12,000 predictors trained on 12 monthly observations. Daniel Buncic re-ran it(...) Metaheuristics for Rule Optimization — With Diversity as the Guardrail [Aligrithm]Hernández-Romo and co-authors ran four population-based optimizers 31 times each, 1000 generations per run, population of 50, tuning an eight-parameter moving-average strategy on five-minute BTC/USDC bars from January 2020 to March 2025. Differential Evolution won on average annualized return with(...) Model-Based or Data-Mined: Lotter's Framing of the Whole Problem [Aligrithm]Johann Christian Lotter opens his workshop deck with four lines that do more work than most methodology chapters. A model is not the reality. The reality is unknown. The same reality can be described with many different models. The best model must be selected by experiment. Every argument in Pillar(...) Price-Path Convexity: A New Cross-Sectional Anomaly [Aligrithm]Take two stocks that both end the month flat. The first bled lower for two weeks, then clawed all the way back. The second ran up for two weeks, then gave it all back. Same start, same finish, same zero return. Sort every stock in the market by past return and these two land in the identical bucket,(...) Dual Momentum Between Gold and Bitcoin (Two Stores of Value) [Aligrithm]An 8-week dual-momentum switch between GLD and IBIT returns 79.91% a year at a Sharpe of 1.64. Vojtko and Dujava report that number on a Quantpedia note covering 31 December 2018 through April 2026, weekly rebalance at Wednesday's close, cash when both lookbacks print negative. Hold the other(...) Factor Timing Mostly Fails — the Honest Version [Aligrithm]Factor timing is the seductive idea that you can do better than holding a basket of factors: lean into value when value looks cheap, load momentum when momentum is running, cut a factor when its volatility spikes. Every one of those moves has a tidy formula and a plausible story. And when you run(...) How to Spot a Fake ML Trading Paper [Aligrithm]Three papers crossed my desk this month. One detects market manipulation with graph neural networks and reports 98.7% accuracy at 8.3 milliseconds per decision. A second, same author cluster, detects anomalies in high-frequency trading and reports a 15% accuracy improvement with an F1 of 0.915. A(...) Stop Using Pairwise Granger: PCMCI for Financial Causality [Aligrithm]Run pairwise Granger tests over a basket of thirty instruments and you get a causal network that looks like a plate of spaghetti. AUD/USD drives copper, copper drives the Aussie back, oil leads the loonie, the loonie leads oil, and somewhere in the mess a small-cap ETF appears to Granger-cause the(...) Bid-Ask Spread From OHLC: The GMM Estimator That Beats Roll/CS [Aligrithm]You backtest a strategy, subtract "a spread" for costs, and move on. Where did that number come from? If you typed in a guess, or pulled a single quoted spread from a vendor, you are almost certainly wrong, and wrong in the one direction that flatters your worst assets. The effective(...) The Mathematics of Machine Learning, for Traders [Aligrithm]You already ran the models. The old article "From One Tree to Forests to Boosting" walked you from a single decision tree to XGBoost, "How a Decision Tree Engineers a New Alpha" showed a tree carving conditional edges out of order-book features, and "Ridge Above 1h, XGBoost(...) The Signal Ceiling: Why No Single-Bar OHLCV Edge Beats Costs in MNQ [Aligrithm]Open any retail futures forum and you will find the same fourteen setups traded as gospel: the opening range breakout, the gap fade, the gap continuation, the volume spike, the liquidity grab reversal, the Asia session expansion. Each comes with a chart, a win rate, and a story about why it works.(...) Fair Value as an Adaptive Low-Pass Filter: LAFO for Mean Reversion [Aligrithm]Every mean-reversion trade starts with a lie you tell yourself about where price "should" be. You call it fair value, you subtract it from the spot price, and you bet the gap closes. Most traders reach for a moving average and stop thinking. Xu, Firoozye, Koukorinis, Treleaven, and Zhu at(...) Bitcoin's Overnight Returns Forecast the VIX [Aligrithm]Split one Bitcoin day into two pieces and only one of them predicts anything. The piece that runs while US stock exchanges are closed, from yesterday's 4pm close to today's 9:30am open, carries a signal for tomorrow's VIX. The piece that runs while those exchanges are open carries(...) Chicken and Egg: Use the SPX to Time the VIX, Not Vice Versa [Aligrithm]Twenty years of retail research points the arrow one way. You read the VIX, and the VIX tells you where the S&P 500 is going. Oversold VIX means complacency, sell stocks; spiked VIX means panic, buy the dip. Connors built a cottage industry on it, and every trading forum still runs some version(...) Momentum Is a Ranking Problem: Learning-to-Rank vs Regress-then-Rank [Aligrithm]Cross-sectional momentum has one job: at each rebalance, order a universe of assets from worst to best, buy the top, sell the bottom. Everyone agrees on that. Where strategies quietly disagree is on how they produce the order. Classic momentum sorts on the past twelve-month return. A neural net(...) Can Machines Learn Weak Signals? Ridge > Zero > Lasso [Aligrithm]Feed 920 firm characteristics into a Lasso to predict next month's stock returns and it will do something that should stop you cold: it loses to a model that predicts zero for every stock. Not "underperforms a good benchmark." Loses to the number 0. Shen and Xiu prove this is not bad(...) Percentile-Rank Momentum With Hysteresis: Low-Churn Signals [Aligrithm]Momentum is the oldest anomaly in the book, and a new momentum paper has to justify why it exists. Landolfi's percentile-rank framework does not sell you the momentum. It sells the plumbing around it: rank each move against its own sign-consistent history instead of a raw threshold, gate(...) State-Space Models for Price: CryptoMamba vs Transformers (Skeptical) [Aligrithm]Every few years a new architecture gets pointed at Bitcoin and a paper announces it won. This round it is Mamba, the selective state-space model that is genuinely reshaping language and vision. Sepehri, Mehradfar, Soltanolkotabi, and Avestimehr at USC built CryptoMamba, a compact Mamba network that(...) Network Momentum as a Cross-Asset Factor [Aligrithm]Momentum is the one factor nobody argues about. Winners keep winning, losers keep losing, and the effect shows up in stocks, bonds, commodities, and currencies across a century of data. The old article "From Intermarket Analysis to Network Momentum" pushed a harder claim: an asset's(...) Trend-Following P&L Is a Function of Autocorrelation (Closed Form) [Aligrithm]Ask a CTA salesperson why their fund makes money and you get a story: markets trend, we ride the trend, we cut losers and let winners run. That story is untestable. Sepp and Lucic did something the industry rarely does. They wrote down the exact profit-and-loss of a standard European trend-follower(...)