Quant Mashup - Quantpedia Factors vs. Sectors in Asset Allocation [Quantpedia]This paper compares and contrasts factor investing and sector investing, and then seeks a compromise by optimally exploiting the advantages of both styles. Our results show that sector investing is effective for reducing risk through diversification while factor investing is better for capturing(...) An Analysis of Momentum Behaviour in the Long-Term [Quantpedia]Motivated by behavioral theories, we test whether recent past performance of the momentum strategy (Past Momentum Performance--PMP) negatively predicts the performance of stale momentum portfolios. Following periods of top-quintile PMP, momentum portfolios exhibit strong reversals 2-5 years after(...) An Example of Trading Model Design by Richard Olsen (Founder of @OANDA) [Quantpedia]We introduce a new approach to algorithmic investment management that yields profitable automated trading strategies. This trading model design is the result of a path of investigation that was chosen nearly three decades ago. Back then, a paradigm change was proposed for the way time is defined in(...) Do Mutual Fund Managers Have Stock-Picking Skill in Lottery Stocks? [Quantpedia]Are portfolio managers skilled in stock-picking? It is a popular subject for academic research and majority of papers show that active funds underperform their respective benchmarks. But... It doesn't mean professionals do not know how to pick stocks. It can simply mean that a lot of managers(...) Is VIX Index Manipulated? [Quantpedia]At the settlement time of the VIX Volatility Index, volume spikes on S&P 500 Index (SPX) options, but only in the out-of-the-money options that are used to calculate the VIX, and more so for options with a higher and discontinuous influence on VIX. We investigate alternative explanations of(...) Analysis of Commodity Futures Returns Over the Last Decade [Quantpedia]Long-only commodity futures returns have been very disappointing over the last decade, leading some to wonder if it was a mistake to invest in commodities. The poor performance is the result of poor “income returns” and not of falling commodity prices. This observation may be surprising for many(...) The Intrinsic Value of Gold [Quantpedia]In this paper, we propose a gold price index that enables market participants to separate the change in the ‘intrinsic’ value of gold from changes in global exchange rates. The index is a geometrically weighted average of the price of gold denominated in different currencies, with weights that(...) Market State Impact on Cross-Sectional and Time-Series Momentum Strategy [Quantpedia]Recent evidence on momentum returns shows that the time-series (TS) strategy outperforms the cross-sectional (CS) strategy. We present new evidence that this happens only when the market continues in the same state, UP or DOWN. In fact, we find that the TS strategy underperforms the CS strategy when(...) Why have asset price properties changed so little in 200 years? [Quantpedia]We first review empirical evidence that asset prices have had episodes of large fluctuations and been inefficient for at least 200 years. We briefly review recent theoretical results as well as the neurological basis of trend following and finally argue that these asset price properties can be(...) Momentum and Reversal Combined with Volatility Effect in Stocks [Quantpedia]Folks from Quantopian did a new independent analysis of a strategy we have in our database. An article is written by Jeremy Muhia and is focused on Momentum and Reversal Combined with Volatility Effect in Stocks (Strategy #155): https://www.quantopian.com/posts/do-momentum-and-reversals-coexist(...) Analysis of Asymmetrical Moving Average for Buy/Sell Signals [Quantpedia]ost market participants are risk adverse and people tend to close their long positions once they perceive a formation of downturn in the market. Large sudden price drops can always be observed near the end of uptrends. On the other hand, people tend to have their own preferences in deciding the(...) FX Carry Risk Mitigation Papers [Quantpedia]We analyze the worst currency carry loss episodes in recent decades, including causes, attribution by currency, timing, and the duration of carry drawdowns. To explore the determinants of the length of carry losses, a model of carry drawdown duration is estimated. We find evidence that drawdown(...) The No-Short Return Premium [Quantpedia]Theory predicts that securities with greater limits to arbitrage are more subject to mispricing and thus should command a higher return premium. We test this prediction using the unique regulatory setting from the Hong Kong stock market, in which some stocks can be sold short and others cannot. We(...) How Short Positions Affect Factor Investing? [Quantpedia]The performances of factor investing rely heavily on short sales, not only for building the initial long-short strategy, but also for regularly rebalancing the positions. Since short selling is subject to both legal restrictions and substantial costs, this paper examines how severely restrictions on(...) Are Hedge Funds Betting Against Low-Volatility Stocks? [Quantpedia]The low-volatility anomaly is often attributed to limits to arbitrage, such as leverage, short-selling and benchmark constraints. One would therefore expect hedge funds, which are typically not hindered by these constraints, to be the smart money that is able to benefit from the anomaly. This paper(...) Value and Growth Stock Behavior During Market Declines [Quantpedia]Using data for five major stock market declines during the 1987-2008 period, this paper provides evidence that value stocks are generally less sensitive to major stock market declines than growth stocks, controlling for beta, firm size, and industry group. Further analysis using several hundred(...) Common Factor Structure in a Cross-Section of Stocks [Quantpedia]We seek to describe the broad cross-section of average stock returns. We follow the APT literature and estimate the common factor structure among a large cross-section containing 278 decile portfolios (associated with 28 market anomalies). Our statistical model contains seven common factors (with an(...) PutWrite vs. BuyWrite Index Differences [Quantpedia]The CBOE PutWrite Index has outperformed the BuyWrite Index by approximately 1.1 percent per year between 1986 and 2015. That is pretty impressive. But troubling. Yes – troubling – because the theory of put-call parity tells us that such outperformance should be almost impossible via a(...) Purifying Factor Premiums in Equity Markets [Quantpedia]In this paper we consider the question of how to improve the efficacy of strategies designed to capture factor premiums in equity markets and, in particular, from the value, quality, low risk and momentum factors. We consider a number of portfolio construction approaches designed to capture factor(...) Seasonalities in Stock Returns [Quantpedia]Existing research has documented cross-sectional seasonality of stock returns – the periodic outperformance of certain stocks relative to others during the same calendar month, weekday, or pre-holiday periods. A model based on the differential sensitivity of stocks to investor mood explains these(...) Trading Strategy Series with @Quantopian: Cross-Sectional Equity Mean Reversion [Quantpedia]Quantopian & Quantpedia Trading Strategy Series continues ... Now with a 4th article, again written by Matthew Lee, focused on Cross-Sectional Equity Mean Reversion (Strategy #13):(...) An Effect of Monetary Conditions on Carry Trades [Quantpedia]This paper investigates the relation between monetary conditions and the excess returns arising from an investment strategy that consists of borrowing low-interest rate currencies and investing in currencies with high interest rates, so-called "carry trade". The results indicate that carry(...) An Interesting Analysis of Shiller's CAPE Ratio [Quantpedia]Robert Shiller shows that Cyclically Adjusted Price to Earnings Ratio (CAPE) is strongly associated with future long-term stock returns. This result has often been interpreted as evidence of market inefficiency. We present two findings that are contrary to such an interpretation. First, if markets(...) Sources of Return for CTAs - A Brief Survey of Relevant Research [Quantpedia]This survey paper will discuss the (potential) structural sources of return for both CTAs and commodity indices based on a review of empirical research articles from both academics and practitioners. The paper specifically covers (a) the long-term return sources for both managed futures programs and(...) An Impact of Correlation and Volatility on a Pairs Trading Strategy [Quantpedia]This paper explains the idiosyncratic risk puzzle in a novel test setting with a combination of arbitrage risk and arbitrage asymmetry as in Stambaugh/Yu/Yuan (2015). We utilize the popular investment strategy pairs trading to identify a different kind of mispricing and find a dominant negative(...) Market Leverage as an Explanation of Low Volatility Anomaly [Quantpedia]The 'low-beta' or 'low-volatility anomaly' is one of the most researched in the field of 'alternative beta'. Despite strong published evidence going back to the 1970s that high beta/volatility stocks underperform relative to expectations generated by the Capital Asset(...) What is the Capacity of Smart Beta Strategies? [Quantpedia]Using a transaction cost model, and an assumption for the smart beta premium observed in data, we estimate the capacity of momentum, quality, value, size, minimum volatility, and a multi-factor combination of the first four strategies. Flows into these factor strategies incur transaction costs. For(...) A Reversal-Based Trading Strategy Around Earnings Announcements [Quantpedia]This study documents that earnings announcements serve as a reality check on short-term, fear and greed driven price development: stocks with extreme abnormal returns in the week before an earnings announcement experience strong price reversal around the announcement. A trading strategy that(...) Tail Protection of Trend-Following Strategies [Quantpedia]The performance of trend following strategies can be ascribed to the difference between long-term and short-term realized variance. We revisit this general result and show that it holds for various definitions of trend strategies. This explains the positive convexity of the aggregate performance of(...) Zero-Crossing Variant of Pairs Trading Strategy [Quantpedia]Pairs trading is a venerable trading strategy. There is agreement that it worked fine in the far past. But it is less clear if it still profitable today. In this working paper the universe of eligible pairs is defined by the holdings of a given ETF. It is shown that the stocks must be from ETFs(...) Cointegration and Pairs Trading in Stocks [Quantpedia]We examine a new method for identifying close economic substitutes in the context of relative value arbitrage. We show that close economic substitutes correspond to a special case of cointegration whereby individual prices have approximately the same exposure to a common nonstationary factor. A(...) Option Pricing Methods in the Late 19th Century [Quantpedia]This paper examines option pricing methods used by investors in the late 19th century. Based on the book called “PUT-AND-CALL” written by Leonard R. Higgins in 1896 and published in 1906 it is shown that investors in that period used routinely the put-call parity for option conversion and static(...) Does Interest Rate Exposure Explain the Low Volatility Anomaly? [Quantpedia]We show that part of the outperformance of low volatility stocks can be explained by a premium for interest rate exposure. Low volatile portfolios have a positive exposure to interest rates, whereas the more volatile stocks have a negative exposure. Incorporating an interest rate premium explains(...) Carry Trade Returns and Political Risks [Quantpedia]This paper elucidates the channels through which sovereign risk, exchange rates and currency risk premia are related. I show that the channels are different depending on whether a country is classified as emerging or an advanced economy. Generally, for emerging market economies, local sovereign risk(...) Quantopian Trading Strategy Series: Reversal during Earnings Announcements [Quantpedia]We are really excited that Quantopian & Quantpedia Trading Strategy Series continues with a second article focused on Reversal Effect during Earning Announcements (Strategy #307). Click on a "View Notebook" button to read a complete analysis:(...) Effect of Maturity Structure of Roll Yields in Commodity Futures Strategies [Quantpedia]We investigate the maturity-structure of roll strategy returns in the energy futures markets. Our innovation is to report and analyze the risk/return profile, the Sharpe ratio, and the asset pricing loadings of rollover strategies based on futures contracts of the same underlying commodity but with(...) Equity Anomalies Persist in International Markets [Quantpedia]Motivated by McLean and Pontiff (2016), we study the pre- and post-publication return predictability of 138 anomalies in 39 stock markets. Based on more than a million anomaly country-months, we find that the United States is the only country with a statistically significant and economically(...) Two Recent Papers Related to FX Carry Strategy [Quantpedia]In this paper, we analyse the relationship between the currency carry return and volatility and liquidity risk factors. We find that both categories of risk factors are relevant to understanding and explaining carry return, with an outperformance for volatility ones especially the global FX(...) Using Fundamentals to Improve Pairs Trading Strategy [Quantpedia]Pairs trading strategy’s return depends on the divergence/convergence movements of a selected pair of stocks’ prices. However, if the stable long term relationship of the stocks changes, price will not converge and the trade opened after divergence will close with losses. We propose a new model(...) Asset Class Risk Premiums Explained by Skewness [Quantpedia]We present extensive evidence that "risk premium" is strongly correlated with tail-risk skewness but very little with volatility. We introduce a new, intuitive definition of skewness and elicit an approximately linear relation between the Sharpe ratio of various risk premium strategies(...) Impact of 1987 Black Monday on Trading Behavior of Stock Investors [Quantpedia]Using a simple sign test, we report new empirical evidence, taken from both the US and the German stock markets, showing that trading behavior substantially changed around Black Monday in 1987. It turned out that before Black Monday investors behaved more as in the momentum strategy; and after Black(...) Quantpedia Trading Strategy Series at Quantopian [Quantpedia]We are really excited that we can announce, that Quantopian started to publish series of articles where they will really deeply analyze some of Quantpedia's suggested strategies. We think, that Soeng Lee from Quantopian did a really good job with a first article, so we just wanted to point that(...) Has Momentum Lost Its Momentum? [Quantpedia]We evaluate the robustness of momentum returns in the US stock market over the period 1965 to 2012. We find that momentum profits have become insignificant since the late 1990s partially driven by pronounced increase in the volatility of momentum profits in the last 14 years. Investigations of(...) Taxonomy of CTAs [Quantpedia]Recently a range of alternative risk premia products have been developed promising investors hedge fund/CTA like returns with higher liquidity, transparency and relatively low fees. The attractiveness of these products rests on the assumption that they can deliver similar returns. Using a novel(...) Momentum Anomaly and Baseball Cards [Quantpedia]We show that the market for baseball cards exhibits anomalies that are analogous to those that have been documented in financial markets, namely, momentum, price drift in the direction of past fundamental performance, and IPO under performance. Momentum profits are higher among active players than(...) Information Ratio Analysis of Time-Series Momentum Strategy [Quantpedia]In the past 20 years, momentum or trend following strategies have become an established part of the investor toolbox. We introduce a new way of analyzing momentum strategies by looking at the information ratio (IR, average return divided by standard deviation). We calculate the theoretical IR of a(...) Trend Model via Difference Between Long and Short-Term Variance [Quantpedia]We relate the performance of trend following strategy to the difference between a long-term and a short-term variance. We show that this result is rather general, and holds for various definitions of the trend. We use this result to explain the positive convexity property of CTA performance and show(...) Factor Attribution of Jim Cramer's Mad Money Charitable Trust [Quantpedia]This study analyzes the complete historical performance of Jim Cramer’s Action Alerts PLUS portfolio from 2001 to 2016 which includes many of the stock recommendations made on Cramer’s TV show “Mad Money”. Both since inception of the portfolio and since the start of “Mad Money” in 2005(...) Forecasting the VIX to Improve VIX-Derivatives Trading [Quantpedia]Konstantinidi et. al. state in their broad survey of Volatility-Index forecasting: "The question whether the dynamics of implied volatility indices can be predicted has received little attention". The overall result of this and the quoted papers is: The VIX is too a very limited extend (R2(...) Cliff Asness's (AQR) View on Factor Timing [Quantpedia]Everyone seems to want to time factors. Often the first question after an initial discussion of factors is “ok, what’s the current outlook?” And the common answer, “the same as usual,” is often unsatisfying. There is powerful incentive to oversell timing ability. Factor investing is often(...)