Quant Mashup - Jonathan Kinlay

Pairs Trading - Part 2: Practical Considerations [Jonathan Kinlay]

One of the first things you quickly come to understand in equity pairs trading is how important it is to spread your risk. The reason is obvious: stocks are subject to a multitude of risk factors – amongst them earning shocks and corporate actions -that can blow up an otherwise profitable pairs

*- 6 months ago, 21 Feb 2019, 09:59pm -*

A Universal Stock Screening Application [Jonathan Kinlay]

*- 8 months ago, 11 Jan 2019, 09:56am -*

Math-TWS: Connecting Wolfram Mathematica to IB TWS [Jonathan Kinlay]

At long last, it’s here! MATH-TWS is a new Mathematica package that connects Wolfram Mathematica to the Interactive Brokers TWS platform via the C++ API. It enables the user to retrieve information from TWS on accounts, portfolios and positions, as well as historical and real-time market data.

*- 10 months ago, 22 Oct 2018, 04:51pm -*

Cointegration Breakdown [Jonathan Kinlay]

One of the perennial difficulties in developing statistical arbitrage strategies is the lack of reliable methods of estimating a stationary portfolio comprising two or more securities. In a prior post (below) I discussed at some length one of the primary reasons for this, i.e. the lower power of

*- 11 months ago, 10 Oct 2018, 04:00pm -*

Beating the S&P500 Index with a Low Convexity Portfolio [Jonathan Kinlay]

A primer on beta convexity and its applications is given in the following post: The essential idea is to evaluate the beta of stock during down-markets, separately from periods when the market is performing well. Beta convexity is a measure of how stable a stock beta is across market regimes, and by

*- 1 year ago, 17 Sep 2018, 09:34pm -*

Regime-Switching & Market State Modeling [Jonathan Kinlay]

The Excel workbook referred to in this post can be downloaded here. Market state models are amongst the most useful analytical techniques that can be helpful in developing alpha-signal generators. That term covers a great deal of ground, with ideas drawn from statistics, econometrics, physics and

*- 1 year ago, 24 Aug 2018, 08:13am -*

Resources for Quantitative Analysts [Jonathan Kinlay]

Two of the smartest econometricians I know are Prof. Stephen Taylor of Lancaster University, and Prof. James Davidson of Exeter University. I recall spending many profitable hours in the 1980’s with Stephen’s book Modelling Financial Time Series, which I am pleased to see has now been reprinted

*- 1 year ago, 22 Aug 2018, 11:04pm -*

Can Machine Learning Be Used To Predict Market Direction? The 1,000,000 Model Test [Jonathan Kinlay]

During the 1990’s the advent of Neural Networks unleashed a torrent of research on their applications in financial markets, accompanied by some rather extravagant claims about their predicative abilities. Sadly, much of the research proved to be sub-standard and the results illusionary, following

*- 1 year ago, 21 Aug 2018, 10:40pm -*

On Testing Direction Prediction Accuracy [Jonathan Kinlay]

As regards the question of forecasting accuracy discussed in the paper on Forecasting Volatility in the S&P 500 Index, there are two possible misunderstandings here that need to be cleared up. These arise from remarks by one commentator as follows: “An above 50% vol direction forecast looks

*- 1 year ago, 20 Aug 2018, 09:22am -*

Range-Based EGARCH Option Pricing Models (REGARCH) [Jonathan Kinlay]

The research in this post and the related paper on Range Based EGARCH Option pricing Models is focused on the innovative range-based volatility models introduced in Alizadeh, Brandt, and Diebold (2002) (hereafter ABD). We develop new option pricing models using multi-factor diffusion approximations

*- 1 year ago, 20 Aug 2018, 09:21am -*

Long Memory and Regime Shifts in Asset Volatility [Jonathan Kinlay]

This post covers quite a wide range of concepts in volatility modeling relating to long memory and regime shifts and is based on an article that was published in Wilmott magazine and republished in The Best of Wilmott Vol 1 in 2005. A copy of the article can be downloaded here. One of the defining

*- 1 year ago, 17 Aug 2018, 10:16am -*

Robustness in Quantitative Research and Trading [Jonathan Kinlay]

One of the most highly desired properties of any financial model or investment strategy, by investors and managers alike, is robustness. I would define robustness as the ability of the strategy to deliver a consistent results across a wide range of market conditions. It, of course, by no means the

*- 1 year ago, 13 Aug 2018, 12:05pm -*

Modeling Asset Volatility [Jonathan Kinlay]

I am planning a series of posts on the subject of asset volatility and option pricing and thought I would begin with a survey of some of the central ideas. The attached presentation on Modeling Asset Volatility sets out the foundation for a number of key concepts and the basis for the research to

*- 1 year ago, 13 Aug 2018, 12:04pm -*

Yield Curve Construction Models - Tools & Techniques [Jonathan Kinlay]

Yield curve models are used to price a wide variety of interest rate-contingent claims. The existence of several different competing methods of curve construction available and there is no single standard method for constructing yield curves and alternate procedures are adopted in different business

*- 1 year ago, 12 Aug 2018, 10:35pm -*

The Lognormal Mixture Variance Model [Jonathan Kinlay]

The LNVM model is a mixture of lognormal models and the model density is a linear combination of the underlying densities, for instance, log-normal densities. The resulting density of this mixture is no longer log-normal and the model can thereby better fit skew and smile observed in the market. The

*- 1 year ago, 11 Aug 2018, 10:45am -*

Volatility Metrics [Jonathan Kinlay]

All that began to change around 2000 with the advent of high frequency data and the concept of Realized Volatility developed by Andersen and others (see Andersen, T.G., T. Bollerslev, F.X. Diebold and P. Labys (2000), “The Distribution of Exchange Rate Volatility,” Revised version of NBER

*- 1 year ago, 10 Aug 2018, 10:17am -*

Using Volatility to Predict Market Direction [Jonathan Kinlay]

We can decompose the returns process Rt as follows: While the left hand side of the equation is essentially unforecastable, both of the right-hand-side components of returns display persistent dynamics and hence are forecastable. Both the signs of returns and magnitude of returns are conditional

*- 1 year ago, 10 Aug 2018, 10:16am -*

Career Opportunity for Quant Traders [Jonathan Kinlay]

We are looking for 3-4 traders (or trading teams) to showcase as Strategy Managers on our Algorithmic Trading Platform. Ideally these would be systematic quant traders, since that is the focus of our fund (although they don’t have to be). So far the platform offers a total of 10 strategies in

*- 1 year ago, 10 Aug 2018, 09:56am -*

Understanding Stock Price Range Forecasts [Jonathan Kinlay]

Range forecasts are produced by estimating the parameters of a Geometric Brownian Motion process from historical data and using the model to project a large number of sample paths for the stock price over the coming month and year. For example, this is a range forecast for Netflix, Inc. (NFLX) as at

*- 1 year ago, 29 Jul 2018, 12:50am -*

Correlation Analysis of Emerging Markets [Jonathan Kinlay]

*- 1 year ago, 25 Jun 2018, 09:35am -*

A Simple Momentum Strategy [Jonathan Kinlay]

Momentum trading strategies span a diverse range of trading ideas. Often they will use indicators to determine the recent underlying trend and try to gauge the strength of the trend using measures of the rate of change in the price of the asset. One very simple momentum concept, a strategy in

*- 1 year ago, 19 Jun 2018, 12:21pm -*

Analyzing the FDIC Dataset [Jonathan Kinlay]

*- 1 year ago, 2 Oct 2017, 11:49am -*

Correlation Copulas [Jonathan Kinlay]

Continuing a previous post, in which we modeled the relationship in the levels of the VIX Index and the Year 1 and Year 2 CBOE Correlation Indices, we next turn our attention to modeling changes in the VIX index. In case you missed it, the post can be found here: Correlation Cointegration We saw

*- 2 years ago, 11 Sep 2017, 01:07pm -*

Correlation Cointegration [Jonathan Kinlay]

In a previous post I looked at ways of modeling the relationship between the CBOE VIX Index and the Year 1 and Year 2 CBOE Correlation Indices: The question was put to me whether the VIX and correlation indices might be cointegrated. Let’s begin by looking at the pattern of correlation between the

*- 2 years ago, 29 Aug 2017, 11:04am -*

Modeling Volatility and Correlation [Jonathan Kinlay]

In a previous blog post I mentioned the VVIX/VIX Ratio, which is measured as the ratio of the CBOE VVIX Index to the VIX Index. The former measures the volatility of the VIX, or the volatility of volatility. A follow-up article in ZeroHedge shortly afterwards pointed out that the VVIX/VIX ratio had

*- 2 years ago, 21 Aug 2017, 11:28pm -*

Beta Convexity [Jonathan Kinlay]

Around a quarter of a century ago I wrote a paper entitled “Equity Convexity” which – to my disappointment – was rejected as incomprehensible by the finance professor who reviewed it. But perhaps I should not have expected more: novel theories are rarely well received first time around. I

*- 2 years ago, 30 May 2017, 08:34am -*

Pairs Trading with Copulas [Jonathan Kinlay]

In a previous post, Copulas in Risk Management, I covered in detail the theory and applications of copulas in the area of risk management, pointing out the potential benefits of the approach and how it could be used to improve estimates of Value-at-Risk by incorporating important empirical features

*- 2 years ago, 6 Mar 2017, 03:38am -*

Modeling Asset Processes [Jonathan Kinlay]

Over the last twenty five years significant advances have been made in the theory of asset processes and there now exist a variety of mathematical models, many of them computationally tractable, that provide a reasonable representation of their defining characteristics. While the Geometric Brownian

*- 2 years ago, 20 Feb 2017, 05:06am -*

Conditional Value at Risk Models [Jonathan Kinlay]

One of the most widely used risk measures is the Value-at-Risk, defined as the expected loss on a portfolio at a specified confidence level. In other words, VaR is a percentile of a loss distribution. But despite its popularity VaR suffers from well-known limitations: its tendency to underestimate

*- 2 years ago, 6 Feb 2017, 12:08pm -*

Trading Market Sentiment [Jonathan Kinlay]

Text and sentiment analysis has become a very popular topic in quantitative research over the last decade, with applications ranging from market research and political science, to e-commerce. In this post I am going to outline an approach to the subject, together with some core techniques, that have

*- 2 years ago, 28 Nov 2016, 03:38pm -*

Applications of Graph Theory In Finance [Jonathan Kinlay]

Very large datasets – comprising voluminous numbers of symbols – present challenges for the analyst, not least of which is the difficulty of visualizing relationships between the individual component assets. Absent the visual clues that are often highlighted by graphical images, it is easy for

*- 3 years ago, 12 Sep 2016, 08:09pm -*

Metal Logic [Jonathan Kinlay]

Precious metals have been in free-fall for several years, as a consequence of the Fed’s actions to stimulate the economy that have also had the effect of goosing the equity and fixed income markets. All that changed towards the end of 2015, as the Fed moved to a tightening posture. So far, 2016

*- 3 years ago, 22 Aug 2016, 04:39am -*

Dynamic Time Warping [Jonathan Kinlay]

History does not repeat itself, but it often rhymes – Mark Twain You certainly wouldn’t know it from a reading of the CBOE S&P500 Volatility Index (CBOE:VIX), which printed a low of 11.44 on Friday, but there is a great deal of uncertainty about the prospects for the market as we move

*- 3 years ago, 15 Aug 2016, 10:54am -*

Machine Learning Trading Systems [Jonathan Kinlay]

The SPDR S&P 500 ETF (SPY) is one of the widely traded ETF products on the market, with around $200Bn in assets and average turnover of just under 200M shares daily. So the likelihood of being able to develop a money-making trading system using publicly available information might appear to be

*- 3 years ago, 9 Aug 2016, 12:36am -*

Developing A Volatility Carry Strategy [Jonathan Kinlay]

By way of introduction we begin by reviewing a well known characteristic of the iPath S&P 500 VIX ST Futures ETN (NYSEArca:VXX). In common with other long-volatility ETF /ETNs, VXX has a tendency to decline in value due to the upward sloping shape of the forward volatility curve. The chart below

*- 3 years ago, 14 Jul 2016, 11:12am -*

Is Internal Bar Strength A Random Walk? The Case of Exxon-Mobil [Jonathan Kinlay]

For those who prefer a little more rigor in their quantitative research, I can offer more a somewhat more substantive statistical argument in favor of the IBS indication discussed in my previous post. Specifically, we can show quite convincingly that the IBS process is stationary, a highly desirable

*- 3 years ago, 20 Jun 2016, 09:26pm -*

The Internal Bar Strength Indicator [Jonathan Kinlay]

Internal Bar Strength (IBS) is an idea that has been around for some time. IBS is based on the position of the day’s close in relation to the day’s range: it takes a value of 0 if the closing price is the lowest price of the day, and 1 if the closing price is the highest price of the day. More

*- 3 years ago, 3 Jun 2016, 08:51pm -*

Seasonal Effects in Equity Markets [Jonathan Kinlay]

There are a plethora of seasonal anomalies documented in academic research. For equities these include the Halloween effect (“Sell in May”), January effect, turn-of-the-month effect, weekend effect and holiday effect. For example, Bouman and Jacobsen (2002) and Jacobsen and Visaltanachoti (2009)

*- 3 years ago, 23 May 2016, 09:20am -*

Trading With Indices [Jonathan Kinlay]

In this post I want to discuss ways to make use of signals from relevant market indices in your trading. These signals can add value regardless of whether you trade algorithmically or manually. The techniques described here are one of the most widely applicable in the quantitative analyst's

*- 3 years ago, 17 May 2016, 12:02pm -*

Some Further Notes on Market Timing [Jonathan Kinlay]

Almost at the very moment I published a post featuring some interesting research by Glabadanidis (“Market Timing With Moving Averages” (2015), International Review of Finance, Volume 15, Number 13, Pages 387-425 – see Yes, You Can Time the Market. How it Works, And Why), several readers wrote

*- 3 years ago, 8 May 2016, 07:23pm -*

Information Content of Pre- and Post-Market Trading Sessions [Jonathan Kinlay]

I apologize in advance for this rather "wonkish" post, which is aimed chiefly at the high frequency fraternity, or those at least who trade intra-day, in the equity markets. Such minutiae are the lot of those engaged in high frequency trading. I promise that my next post will be of more

*- 3 years ago, 20 Apr 2016, 11:04am -*

High Frequency Trading: Equities vs. Futures [Jonathan Kinlay]

Pretty obviously, he had been making creative use of the "money management" techniques so beloved by futures systems designers. I invited him to consider how it would feel to be trading a 1,000-lot E-mini position when the market took a 20 point dive. A $100,000 intra-day drawdown might

*- 3 years ago, 11 Apr 2016, 02:44pm -*

Reflections on Careers in Quantitative Finance [Jonathan Kinlay]

Carnegie Mellon's Steve Shreve is out with an interesting post on careers in quantitative finance, with his commentary on the changing landscape in quantitative research and the implications for financial education. I taught at Carnegie Mellon in the late 1990's, including its excellent

*- 3 years ago, 19 Mar 2016, 11:58pm -*

Trading the Presidential Election [Jonathan Kinlay]

There is a great deal of market lore related to the US presidential elections. It is generally held that elections are good for the market, regardless of whether the incoming president is Democrat or Republican. To examine this thesis, I gathered data on presidential elections since 1950,

*- 3 years ago, 10 Mar 2016, 02:53am -*

Yes, You Can Time the Market. How it Works, And Why [Jonathan Kinlay]

One of the most commonly cited maxims is that market timing is impossible. In fact, empirical evidence makes a compelling case that market timing is feasible and can yield substantial economic benefits. What’s more, we even understand why it works. For the typical portfolio investor, applying

*- 3 years ago, 23 Feb 2016, 10:12am -*

Profit Margins - Are they Predicting a Crash? [Jonathan Kinlay]

Is Jeremy Grantham, co-founder and CIO of GMO bullish or bearish these days? According to Myles Udland at Business Insider, he’s both. He quotes Grantham: “I think the global economy and the U.S. in particular will do better than the bears believe it will because they appear to underestimate the

*- 3 years ago, 7 Feb 2016, 03:21pm -*

Overnight Trading in the E-Mini S&P 500 Futures [Jonathan Kinlay]

Jeff Swanson's Trading System Success web site is often worth a visit for those looking for new trading ideas. A recent post Seasonality S&P Market Session caught my eye, having investigated several ideas for overnight trading in the E-minis. Seasonal effects are of course widely recognized

*- 3 years ago, 30 Nov 2015, 11:22pm -*

Improving A Hedge Fund Investment - Cantab Capital's Quantitative Aristarchus Fund [Jonathan Kinlay]

In this post I am going to take a look at what an investor can do to improve a hedge fund investment through the use of dynamic capital allocation. For the purposes of illustration I am going to use Cantab Capital’s Aristarchus program – a quantitative fund which has grown to over $3.5Bn in

*- 3 years ago, 24 Nov 2015, 01:28pm -*

Investing in Leveraged ETFs - Theory and Practice [Jonathan Kinlay]

Summary Leveraged ETFs suffer from decay, or “beta slippage.” Researchers have attempted to exploit this effect by shorting pairs of long and inverse leveraged ETFs. The results of these strategies look good if you assume continuous compounding, but are often poor when less frequent compounding

*- 4 years ago, 7 May 2015, 06:22am -*

Is Your Strategy Still Working? [Jonathan Kinlay]

One of the challenges faced by investment strategists is to assess whether a strategy is continuing to perform as it should. This applies whether it is a new strategy that has been backtested and is now being traded in production, or a strategy that has been live for a while. Fig 6All strategies

*- 4 years ago, 8 Apr 2015, 09:49am -*