In the world of trend following, the biggest, most longstanding debate is about whether or not to target a certain level of volatility on an ongoing basis. Listeners of the podcast Top Traders Unplugged will be very familiar with this debate. Unfortunately, some of the language surrounding this

This blog is just a personal hobby. When I’m extra busy as I was this year the blog is a front-line casualty. This is why 2023 saw a weaker posting stream. Nonetheless I am pleased with just over 30K visits this year, with an average of roughly one minute per visit (engagement time, whatever

The performance of factors was unexciting and poor in 2023 Quality performed the best, low volatility the worst Low-risk and cheap stocks are currently highly correlated INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years. Specifically, we only

The weekend (or Monday) effect in the stock market refers to the phenomenon where stock returns exhibit different patterns on Mondays compared to the rest of the week. Historically, there has been a tendency for stock prices to be lower on Mondays. Various theories attempt to explain the weekend

Over 1,200,000 options contracts trade daily. Storing options data for analysis has become something only professionals can do using sophisticated tools. One of the professionals recently open sourced their tools for lightening fast data storage and retrieval. ArcticDB is a DataFrame database that

Systematic default risk is the probability of a critical share of the corporate sector defaulting simultaneously. It can be analyzed through a corporate default model that accounts for both firm-level and communal macro shocks. Point-in-time estimation of such a risk metric requires accounting data

That riskier assets should command higher expected returns is the most basic of asset pricing theories. Clearly, financial distress is a risk characteristic, but it presents a puzzle, as there has not been a linear relationship between it and stock returns. For example, John Birge and Yi Zhang,

Trend following boils down to one basic idea: buy when the price goes up, and sell when it goes down. Its implementation, though, could be much more complicated. There are a myriad methods and timeframes to choose from, and these methods and timeframes are by and large the dials that CTAs can turn

Trading strategies often rely on parameters. To enhance and effectively cross-validate these parameters can provide a competitive advantage in the market. However, reliable cross-validation strategies can lead to look-ahead bias and other pitfalls that can lead to overestimating a strategy’s

The question of whether stock returns are predictable is of long-standing interest to both academics and investment practitioners. Commonly accepted investment strategies, for example, will behave quite differently in the presence of stock return predictability. The research literature is unclear on

Because of the strong evidence, momentum continues to receive much attention from researchers. Out of the hundreds of exhibits in the factor zoo, one of just five equity factors that met all the criteria (persistent, pervasive, robust, implementable, and intuitive) Andrew Berkin and I established in

This end of year rally which started on October 2023 has been strong. My trading buddy and I started wondering how this compares to the past. Is this a “normal” strong rally or an “abnormally” strong one? Determining this is always tough because it depends on the indicators you use. Because

In my previous post I said I was trying to develop new indicators from the results of my new PositionBook optimisation routine. In doing so, I need to have a methodology for judging the quality of the indicator(s). In the past I created a Data-Snooping-Tests-GitHub which contains some tests for

Factor Zoo (.zip) Alexander Swade (Lancaster University) et al. October 2023 The number of factors allegedly driving the cross-section of stock returns has grown steadily over time. We explore how much this ‘factor zoo’ can be compressed, focusing on explaining the available alpha rather than

An equity investor can purchase two kinds of financial insurance. The first, more straightforward kind, is a put option. This contract simply pays off when the S&P 500 (which we’ll use as our stand-in for “equity”) goes down. In other words, it’s like any other insurance contract. It

In a previous post, I described a parametric approach to computing Value-at-Risk (VaR) - called modified VaR12 - that adjusts Gaussian VaR for asymmetry and fat tails present in financial asset returns3 thanks to the usage of a Cornish–Fisher expansion. Modified VaR, when properly used4, provides

The study emphasizes the importance of integrating machine learning with other tools for investment managers, pension-plan administrators, financial advisors, and independent analysts to help investors select active mutual funds with positive alpha. It also highlights the significance of fund

RSI, MACD, Stochastic, ROC, CCI, %b - technical indicators come in many shapes and sizes.[1] Their names suggest something very technical at play. Maybe even scientific. Yet, they are a polarizing tool. They generate strong, opposing opinions. Some traders value them with near religious zeal, while

Usually, regime detection is made with an HMM estimation over price returns or price return volatility. However, Chen and Tsang (2021) propose to use the Directional Change indicators as input for a HMM to detect regime shifts. They show that the HMM applied to the Directional Change indicators

This article explains how to build the two Python scripts you need to use premium data to create a custom data bundle using Zipline Reloaded. Step 1: Subscribe to premium data By now you should already have an account with Nasdaq Data Link. If not, head over to https://data.nasdaq.com and set one

The part of the attention of our own research from the last few months was a little skewed on the side of countries’ indices and their corresponding ETFs representing them, and we finally conclude our “trilogy” of investigation on the efficiency of these markets. Firstly, we analyzed

The timing of equity factor premiums has a strong allure for investors because academic research has found that factor premiums are both time-varying and dependent on the economic cycle. For example, Arnav Sheth and Tee Lim, authors of the December 2017 study “Fama-French Factors and Business

One of the hardest parts of trading options is picking the best strike price and expiration date for your strategy. Whether a simple covered call or more complex strangles, the key to success is constructing the position. But backtesting options is tough: There are millions of contracts that trade

Here in Australia, we’re right in the depths of the silly season. We indulge in long lunches, take days off work, and generally let our hair down. In that spirit, I thought I might have some fun punting shitcoins. (Maybe my definition of fun differs from yours, but let’s run with it). For the

Twas the night before Christmas, and all through the house.... OK I can't be bothered. It was quiet, ok? Not a creature was stirring... literally nothing was moving basically. And then a fat guy in a red suit squeezed through the chimney, which is basically breaking and entering, and found a

Wednesday is a Fed Day. Fed Days have historically shown an upside tendency. I have documented this tendency in great detail over the years. A higher close today would not be the most favorable Fed Day setup. A big reason for this is that it would mark a 20-day high close. Fed Day bullishness has

Managed futures / trend following is a valuable strategy to have in a portfolio, but it's also somewhat difficult to hold. The reason is that its positive performance tends to come in bursts, as opposed to steadily over time. This can (and does) lead to frustration as the investment in managed

Small-cap investing is intuitively appealing However, small-caps have underperformed in most markets Screening out low-quality small-caps has not helped significantly INTRODUCTION Investing means parting ways with your money, which is not something we tend to do lightly. The easiest way to get

In this article we will explore simulation of Brownian Motions, one of the most fundamental concepts in derivatives pricing. Brownian Motion is a mathematical model used to simulate the behaviour of asset prices for the purposes of pricing options contracts. A typical means of pricing such options

Here’s a backtest of Gary Antonacci’s DMSR (Dual Momentum Sector Rotation) strategy. The author is best known for his GEM (Global Equity Momentum) strategy, which he popularised in 2014, in his book « Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk »,

The paper, “Adaptive Asset Allocation: A Primer” by Adam Butler, Mike Philbrick, Rodrigo Gordillo, and David Varadi addresses flaws in the traditional application of Modern Portfolio Theory related to Strategic Asset Allocation. It shows that estimating return and (co)variance parameters over

Let’s talk about carry trades. First, what exactly is a carry trade? A carry trade is a trade that pays you to hold it. A position where, if nothing changes except the passing of time, you expect to make money. Let’s go through some examples. FX carry The classic example is the FX carry trade,

Abstract: One of the problems for investment funds is that success contains the seeds of destruction as cash inflows follow outperformance. In his seminal 2005 paper, “Five Myths of Active Portfolio Management,” Jonathan Berk suggested asking, “Who gets money to manage?” He answered that

Long-only trend following is a popular way to protect equity portfolios from huge drawdowns, and for several good reasons: 1) It has the advantage of behaving somewhat like insurance, or put options, in that you’re exposed to much of the upside and not much of the downside. 2) It doesn’t damage

I’ve been trading options contracts for more than 23 years. When I started out, I had to rely on expensive broker data feeds for real-time options data for trading and low-quality free data I scraped from websites for analysis. I spent countless hours reverse engineering the CBOE website for

XGBoost…!!!! Often considered a miraculous tool embraced by machine learning enthusiasts and competition champions, XGBoost was designed to enhance computational speed and optimise machine learning model’s performance. Let's proceed with XGBoost!!! We will cover the following things: Brief

In today’s newsletter, I’m going to show you how to forecast a time series of US unemployment data using decomposition. Time series decomposition is breaking down a single time series into different parts. Each part represents a pattern that you can try to model and predict. The patterns usually

Market efficiency, higher trading costs and higher expense ratios are not the only hurdles to successful active management (market timing and individual security selection). For taxable investors, the burden of higher taxes raises the hurdle.(1) From 2002 until now, S&P Dow Jones Indices has

Is it better to run your quant trading in the cloud or locally? In this article, I outline the pros and cons of each approach and explain why running locally is often better for research while running in the cloud is better for live trading. Don't assume the cloud is better It's common to

I would like to share my research and thoughts about stochastic volatility models and, in particular, about the log-normal stochastic volatility model that I have been developing in a series of papers (see introductory paper with Piotr Karasinski in 2012, the extension to include quadratic drift

Carry on commodity futures contains information on implicit subsidies, such as convenience yields and hedging premia. Its precision as a trading signal improves when incorporating adjustments for inflation, seasonal effects, and volatility. There is strong evidence for the predictive power of

Financial “wisdom” is said to be cyclical rather than cumulative, but that’s unfair. At least in the dominion of portfolio management and design, academics and money managers have made great strides in decoding Mr. Market’s cryptic signals over the past half century. The challenge, having

A common issue encountered in modern statistics involves the inversion of a matrix. For example, when your data is sick with multicollinearity your estimates for the regression coefficient can bounce all over the place. In finance we use the covariance matrix as an input for portfolio construction.

In my last post about the overnight anomaly, I created a trading signal based on the difference between recent overnight returns and recent intraday returns. I calculated the signal for various time frames (ranging from about a week to about a year), and I mentioned that I applied different

Momentum investors utilize different timeframes to identify high momentum equities: past 6, 9, 12 months as an example. Obviously, there is a significant degree of overlap in momentum stocks identified across various past time frames. However, there has been little research focused on understanding

Default plots often include a few or many bars of misleading data where a strategy may have zeros or NAs compared with the benchmark, for example where the strategy uses a moving average lookback period before generating a trade signal. There’s a simple way to start the plot after the strategy is

Many retail investors focus on generating what they consider to be income, leading to the popularity of dividend-focused strategies. To take advantage of this demand, investment firms have marketed covered call strategies that are purported to not only generate income but also reduce volatility.

In finance, the “overnight anomaly” is the name for the unusual phenomenon that overnight stock market returns are much higher than intraday returns. In a 2008 paper, “Return Differences between Trading and Non-trading Hours: Like Night and Day”, the authors break down the U.S. equity

Thanksgiving week has shown some strong seasonal tendencies over the years. I’ve documented this in years past on the blog. From a seasonal standpoint, Wednesday before Thanksgiving is one of the most bullish trading days of the year. The chart below shows performance from Tuesday’s close to

The Equal Risk Contribution (ERC) portfolio seeks to maximally diversify portfolio risk by equalising the risk contribution of each component. The intuition is as follows: Imagine we have a 3-asset portfolio Assets 1 and 2 are perfectly correlated (correlation of 1.0) Asset 3 is uncorrelated with