Quant Mashup Why bad trading strategies may perform well [Eran Raviv]You probably know that even a trading strategy which is actually no different from a random walk (RW henceforth) can perform very well. Perhaps you chalk it up to short-run volatility. But in fact there is a deeper reason for this to happen, in force. If you insist on using and continuously testing(...) Shorting at High: Algo Trading Strategy in R [Quant Insti]Milind began his career in Gridstone Research, building earnings models and writing earnings notes for NYSE listed companies, covering Technology and REITs sectors. Milind has also worked at CRISIL and Deutsche Bank, where he was involved in modeling of Structured Finance deals covering Asset Backed(...) Low Vol Benefits Fading [Larry Swedroe]Low-volatility strategies have quickly become the darling of many investors, thanks largely to trauma caused by the bear market that arose from the 2008-2009 financial crisis combined with academic research showing that the low-volatility anomaly exists in equity markets around the globe. Earlier(...) Taming the Momentum Investing Roller Coaster: Fact or Fiction? [Alpha Architect]Intermediate-Term Price momentum, originally researched by Jegadeesh and Titman in 1993, documented a how recent stock returns tended to continue in the future. Stocks that were past winners (on average) continue to do well, while stocks that were past losers (on average) continue to perform poorly.(...) What if Factors Rarely Matter? [EconomPic]Back in December I wrote that It's Generally Smart to Avoid Credit Risk outlining that more than 100% of credit's excess performance over time has come when the level of credit spread was extreme. What if the same were true for well known investment factors? Taking a Look at the Small Cap(...) Can Investors Replicate the Dorsey Wright Focus 5 ETF Strategy? [Alpha Architect]A long-time reader asked that we examine the performance and process associated with the Dorsey Wright Focus Five ETF (ticker: FV). For those who are unfamiliar with the product, FV is a $3B+ sector rotation fund. The fund is designed to provide targeted exposure to five sector- and industry-based(...) Optimal Data Windows for Training a Machine Learning Model for Financial Prediction [Robot Wealth]It would be great if machine learning were as simple as just feeding data to an out-of-the box implementation of some learning algorithm, then standing back and admiring the predictive utility of the output. As anyone who has dabbled in this area will confirm, it is never that simple. We have(...) Low Vol Advantage Not What You’d Expect [Larry Swedroe]One of the problems for the first formal asset pricing model developed by financial economists, the Capital Asset Pricing Model (CAPM), was that it predicted a positive relationship between risk and return. However, empirical studies have found the actual relationship to be flat, or even negative.(...) 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(...) When is a "Value" Company not a Value? (h/t Abnormal Returns) [Investing Research]Value has broadly been accepted as an investing style, and historically portfolios formed on cheap valuations outperformed expensive portfolios. But value comes in many flavors, and the factors(s) you choose to measure cheapness can determine your long-term success. In particular, several operating(...) Finding 7.5% Returns [Flirting with Models]This blog post is available as a PDF here. Summary Over the last year, we’ve written about how low interest rates and high equity valuations point to a low return rates for traditionally allocated portfolios. In a State Street survey of over 400 institutional investors, the expected return rate(...) Maximum Likelihood Estimation for Linear Regression [Quant Start]The purpose of this article series is to introduce a very familiar technique, Linear Regression, in a more rigourous mathematical setting under a probabilistic, supervised learning interpretation. This will allow us to understand the probability framework that will subsequently be used for more(...) Backtests for VelocityShares' BSWN, LSVX, and XIVH [Six Figure Investing]I have generated simulated end-of-day close indicative share values (4:15 PM ET) for VelocityShares' BSWN, LSVX, and XIVH Exchange Traded Notes (ETNs) from March 31st, 2004 through July 14th, 2016. BSWN VelocityShares VIX Tail Risk ETN LSVX VelocityShares VIX Variable Long/Short ETN XIVH(...) 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(...) Simple Moving Average Filter | Trading Strategy [Oxford Capital]I. Trading Strategy Source: Kaufman, P. J. (2013). Trading Systems and Methods. New Jersey: John Wiley & Sons, Inc. Concept: Trend following trading strategy based on Simple Moving Average (SMA) filters. Research Goal: To benchmark the Simple Moving Average (SMA) against the Hull Moving Average(...) SEBI Releases Paper on Algorithmic Trading & Co-Location [Quant Insti]SEBI issued a discussion paper today with inputs from all stakeholders such as investors, infrastructure institutions and intermediary to understand how Algorithmic Trading has led to fairness, concerns and changes in market quality in recent years. It states that more than 80% of the orders placed(...) Most Useful Investment Blogs [Dual Momentum]As with many people these days, most of my investment information comes from the internet. It has taken me years to compile a group of research-oriented blogs and websites that I have found most useful. Here is my list: Investment Blogs Quantocracy: This is an aggregator of quantitative trading(...) 50 Years Of Sharpe Ratio Analysis: Useful But Easily Abused [Capital Spectator]The Sharpe ratio was introduced half a century ago and it’s still going strong. Although the world is now awash with competitors, the granddaddy of quantitative risk metrics endures. Its longevity and widespread use drives some analysts batty, but for good or ill the SR is deeply embedded into the(...) Flat and Slightly Down for Trend Following in July [Wisdom Trading]June 2016 Trend Following: UP -1.34% / YTD: -0.92% Not much volatility for the index in the month of July. It started around +1% and finished around -1% with little amplitude in the middle. The YTD just turned slightly negative. Below is the full State of Trend Following report as of last month.(...) How Do VelocityShares' BSWN, LSVX, & XIVH Work? [Six Figure Investing]The indexes that power VelocityShares new BSWN, LSVX, and XIVH funds have been live since 2011, but they haven’t been directly accessible via exchange traded products until July 2016. The goals of these new funds are pretty straightforward, on the long side BSWN & LSVX track upside volatility(...) Start Dates, Correlation and Random Strategy [Alvarez Quant Trading]In my last post I showed research on how optimization results can be mean reverting. Sometimes, my research keeps getting side tracked as I think of random ideas to look at. In this post, we look at the random walk my research took starting from my mean reverting optimization research. I will show(...) Practical Ethereum Arbitrage Experiments [Koppian Adventures]Introduction Inspired by another blogpost I decided to experiment with trading arbitrage between different exchanges. Not so long ago there was a hardfork in the blockchain-based cryptocurrency Ethereum. This means that we now have two Ethereums: Ethereum (ETH) and Ethereum Classic (ETC). The(...) Mailbag: How Do You Move From Quant Developer To Quant Trader? [Quant Start]I was emailed recently with a career-related question about jumping from one quant role to another. The question posed was "How can I make the jump from being a quant/software developer to a quant trader/researcher in a fund or investment bank?". This is certainly possible and does happen(...) Cassandra as a Historical Finance DB [Ryan Kennedy]While the explosion of noSQL database offerings of late can be daunting, each of them is typically suited for a particular purpose. Most CRUD web-applications can be comfortably done with either noSQL or a RDBMS, however for true high performance applications, the choice of database is of(...) Fine Wine is a Fine Addition to Your Investment Portfolio [Alpha Architect]Here we are in August, a great time to drink–and think–about wine. Of course, as a research-focused finance blog, our angle on wine is a bit different than that of Dr. Vino. A summary of the discussion: …we estimate a real financial return to wine investment (net of storage costs) of 4.1%,(...) Paper: Stock Portfolio Design and Backtest Overfitting (h/t Abnormal Returns)We demonstrate a computer program that designs a portfolio consisting of common securities, such as the constituents of the S&P 500 index, that achieves any desired profile via in-sample backtest optimization. Unfortunately, the program also shows that these portfolios typically perform(...) Empirical Analysis of Limit Order Books [Quant Insti]What is an Order book? With the growing popularity of Algorithmic and High Frequency Trading, study of order books has grown manifolds. “Order book” is essentially an electronic list of all Buy and Sell orders, arranged as per price time priority. This means that a person having higher price on(...) Can Dividend (Swaps) Replace Bonds? [Flirting with Models]Summary As a stand-alone asset class, dividends may make an interesting alternative to fixed income: they offer low volatility, are generally robust to market crises, and may serve as an inflation hedge. Accessing dividend strips was previously restricted to institutional investors, using(...) The Case for Hedge Funds / Creating an Ideal Liquid Alt [EconomPic]A hedge fund is simply a go anywhere investment vehicle that attempts to provide excess returns to cash with a low correlation to traditional asset classes (i.e. vehicles that provide alpha). Hedge funds and liquid alternatives have taken a lot of heat recently, much of it deserved, but in this post(...) Clustering: "Two's company, three's a crowd" [Quant Dare]It’s hard enough deciding which Machine Learning technique to use, but after selecting an appropriate clustering algorithm the next challenges begin: how good is the separation and into how many groups should you divide the data? Maybe three is not always a crowd… First, let’s set the scene We(...) Look at Data with a Discerning Eye [Flirting with Models]I recently came across a graph similar to the following while doing some market research. 1 Source: Yahoo! Finance. Analysis by Newfound Research. Data from January 1951 – December 2015. The argument was that the markets are getting more volatile. While this certainly looks to be the case based on(...) Trading Ethereum: Making 10% every 20 minutes [Jon.IO]This is more of a "How to build your own algotrading strategy - the Ethereum edition" and not a "make money fast" blog post. It is also a real example with real returns (and real production errors that cost me money) where you can see how to identify opportunities, why(...) 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(...) Tight Consolidations After New Highs [Quantifiable Edges]The range over the last week has been extremely tight. On 7/20/16 SPY closed at a 50-day high. Every SPY close in the 5 days since 7/20 has been within the intraday range of that 7/20/16 bar. (And it wasn’t even that big of a range.) It is said that consolidations are often resolved in the(...) Momentum on Individual Stocks vs Asset Classes [Sharpe Returns]I had the pleasure of finally meeting Gary Antonacci earlier this year. Gary is the creator of the momentum strategy that I follow and have been discussing on this blog. I first came across his work in 2011 on the blog Abnormal Returns (which should be a daily read for investors). Gary and I have(...) Beginner's Guide to Unsupervised Learning [Quant Start]The majority of machine learning posts to date on QuantStart have all been about supervised learning. In this post we are going to take a look at unsupervised learning, which is a far more challenging area of machine learning. Supervised learning involves taking a number of data observations, each(...) Evidence-Based Investing Requires Less Religion and More Reason [Alpha Architect]During the 1600s, the Dutch had a large merchant fleet and the port city of Amsterdam was a dominant commercial hub for trade from around the world. Based on the growing influence of the Dutch Republic, in 1602 the Dutch East India Company was founded, and its evolution into the first publicly(...) Pair Trading Strategy and Backtesting using Quantstrat [Quant Insti]One of my favorite classes during EPAT was the one on statistical arbitrage, so the pair trading strategy seemed a nice idea for me. My strategy triggers new orders when the pair ratio of the prices of the stocks diverge from the mean. But in order to work, we first have to test for the pair to be(...) The Unbearable Transience of Alpha [Quandl]In 2004 I enjoyed my 15 minutes of fame for an article I wrote called The Tao of Alpha, in which I explained the concept of alpha as a zero-sum game. Sources of alpha in 2004 were much different than those available in the mid-1990s when I started my career and they are also different from(...) Paper: The Trinity Portfolio [Meb Faber]Let’s say one sets out to design a portfolio, knowing everything we know today about investing. Where would a logical, evidence-based investor even start? Investors today have access to more market data and strategic information than at any other time in history. While beneficial in some ways,(...) What is the Proper Benchmark for Momentum or Trend-Following Strategies? [Blue Sky AM]Most academics and practitioners tend to compare momentum or trend-following strategies to a buy and hold investment strategy. They do so by comparing the results of the strategies to a benchmark that is a proxy for buy and hold. From this type of analysis many ‘experts’ justify why the(...) From trading ideas to robust strategies [Better System Trader]To prepare for the previous episode on system trading through the Brexit, I had to dig through some of the past podcast episodes for background information. As I was going through them I realized there was so much great information there, some that I had already forgotten about. Such a shame, all(...) What Drives Momentum Performance? [EconomPic]Mar Vista Investment Partners has a really interesting research piece out The Price You Pay which has a great table outlining the benefit of an asymmetric return profile (i.e. having more market exposure during up markets than down markets). It is a mathematical truism that superior down capture in(...) The Arbitrage of Price-to-Book [Portfolio Perfection]The trending value strategy buys the top 25 stocks by their 6 month price momentum among the top decile of stocks ranked by value composite 2 (VC2), a combination of price-to-earnings ratio, price-to-sales ratio, price-to-book ratio, earnings before interest tax depreciation and amortization to(...) Quantitative Strategy Development Overview – Brian Peterson [Open Source Quant]I have had the pleasure of getting to know and work with Brian Peterson of late building out the blotter::mcsim function in the blotter package. I will be writing about this function soon and where it is headed, but in this post i wanted to share a presentation Brian gave the CapeR User Group last(...) Risk Managing Risk Management [Flirting with Models]Well, despite some recent market turmoil from the Brexit, the S&P 500 is still hovering near its high from last year on a price basis. If we include the reinvestment of dividends, then we have already seen new highs in April, May, and June of this year. As we wrote about previously, a bear(...) Stale Performance Chasing: Beware of Horizon Effects [Alpha Architect]Investors talk a big game when describing how they evaluate mutual funds. They say they consider things like the objectives of the fund, its size, and the longevity of its managers. But there’s one factor that looms larger than all the others: Performance. We wrote here about how investors tend to(...) Unbalanced Classes in Machine Learning and the Stock Market [MKTSTK]Many assets exhibit bull or bear trends which persist for long periods of time. This presents an interesting problem for anyone trying to predict the future return of an asset: a lack of diversity in your training set. This problem is known as unbalanced classes in the machine learning field. The(...) Machine Learning in Algorithmic Trading Systems Presentation [Robot Wealth]Last night it was my pleasure to present at the Tyro Fintech Hub in Sydney on the topic of using machine learning in algorithmic trading systems. Here you can download the presentation Many thanks to all who attended and particularly for the engaging questions. I thoroughly enjoyed myself! In(...) Hull Moving Average Filter | Trading Strategy (Entry & Exit) [Oxford Capital]Developer: Alan Hull. Source: Kaufman, P. J. (2013). Trading Systems and Methods. New Jersey: John Wiley & Sons, Inc. Concept: Trend following trading strategy based on low lag moving averages. Research Goal: To verify performance of the Hull Moving Average (HMA). Specification: Table 1.(...)