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Taleb: "Problems and Inverse Problems" Follow-Up [Blue Event Horizon]
In my previous post I published a bunch of R Scripts that will enable a reader of Taleb's "Silent Risk", Chapter 3, Section 3.2 "Problems and Inverse Problems" to play with the ideas he presents. I thought I should discuss one of the results those scripts produce that does
- 9 years ago, 5 Apr 2016, 03:00pm -
The case for Regime-Switching GARCH [Eran Raviv]
GARCH models are very responsive in the sense that they allow the fit of the model to adjust rather quickly with incoming observations. However, this adjustment depends on the parameters of the model, and those may not be constant. Parameters’ estimation of a GARCH process is not as quick as those
- 9 years ago, 5 Apr 2016, 12:30am -
Snake Oil and Low Volatility Investing [Factor Investor]
It is estimated that 180,000 Chinese immigrated to the United States in the latter half of the 19th century; many of them worked on the Transcontinental Railroad. Deeply routed in Chinese culture, the immigrants brought with them various medicinal remedies for common ailments. It was believed that
- 9 years ago, 4 Apr 2016, 01:16pm -
Yahoo Data and Momentum Rotation - Analysis of 2015 Data [DTR Trading]
I've taken a bit of a break from posting options strategy research, but before I dive back in I'm going to revisit some material I posted on Momentum Rotation systems last year. If you're new to my blog you may have missed my posts related to rotation system results and data. For the
- 9 years ago, 4 Apr 2016, 01:15pm -
Trend Following Down in March [Wisdom Trading]
March 2016 Trend Following: DOWN -2.84% / YTD: +6.86% The index gave back some of its gains from the beginning of the year, last month. The performance is still positive Year-To-Date and over the last 12 months. Below is the full State of Trend Following report as of last month. Performance is
- 9 years ago, 4 Apr 2016, 01:15pm -
Taleb: "Silent Risk", Chapter 3, Section 3.2 "Problems and Inverse Problems" [Blue Event Horizon]
ection 3.2 in Chapter 3 of "Silent Risk", a draft of a book by Nassim Nicholas Taleb defines the "inverse problem" as follows: Definition 3.4 (The inverse problem). There are many more degrees of freedom (hence probability of making a mistake) when one goes from a model to the
- 9 years ago, 4 Apr 2016, 02:36am -
Strategy Development with Perry Kaufman [Better System Trader]
I’m sure we all want to create trading strategies that perform better and last for longer but there are a number of issues we need to look out for when developing robust trading strategies, some are well-known and some perhaps aren’t. In this episode we’ll be talking with Perry Kaufman about
- 9 years ago, 4 Apr 2016, 02:35am -
Evolving Neural Networks through Augmenting Topologies – Part 2 of 4 [Gekko Quant]
This part of the tutorial on using NEAT algorithm explains how genomes are crossed over in a meaningful way maintaining their topological information and how speciation (group genomes into species) can be used to protect weak genomes with new topological information from prematurely being eradicated
- 9 years ago, 2 Apr 2016, 04:18pm -
You don't need to be a scientist to build a backtesting algotrading system in Python [Jon.IO]
This is the another post of the series: How to build your own algotrading platform. Last time we talked about The "for-looper" backtester (as I love to call them). Now it's time to see some code! We said that we have something like that:
- 9 years ago, 2 Apr 2016, 05:15am -
Bayesian Linear Regression Models with PyMC3 [Quant Start]
To date on QuantStart we have introduced Bayesian statistics, inferred a binomial proportion analytically with conjugate priors and have described the basics of Markov Chain Monte Carlo via the Metropolis algorithm. In this article we are going to introduce regression modelling in the Bayesian
- 9 years ago, 1 Apr 2016, 02:24pm -
Bold, Confident & WRONG: Why You Should Ignore Expert Forecasts [GestaltU]
If you read the paper, watch the news, and listen to investment experts you are doing it all wrong. There are no market wizards; the emperors have no clothes; most people are ‘swimming naked’. The following paragraphs offer abundant and incontrovertible evidence condemning expert judgment for
- 9 years ago, 1 Apr 2016, 02:24pm -
Build Better Strategies! Part 4: Machine Learning [Financial Hacker]
Deep Blue was the first computer that won a chess championship, in 1996. It took 20 more years until another computer program, AlphaGo, could defeat the best human Go player. Deep Blue was a model based system with a fixed chess library and hardwired chess rules. AlphaGo is a data-mining system, a
- 9 years ago, 31 Mar 2016, 03:12pm -
Autoregressive model in S&P 500 and Euro Stoxx 50 [Quant Dare]
In this post we are talking about autoregressive models and their application to a financial world. This model follows the idea that the next value of the serie is related with the p previous values. Definition of p-order autoregressive model An autoregressive model or AR is a type of modelling that
- 9 years ago, 31 Mar 2016, 03:12pm -
The Dynamic Duo Of Risk Factors: Part II [Capital Spectator]
Last week’s post on analyzing US equity value and momentum risk premia ended with a question: How much, if any, improvement should we expect by adding a dynamic system for managing exposure to these risk factors vs. a buy-and-hold strategy? What follows is a preliminary effort in searching for an
- 9 years ago, 31 Mar 2016, 03:11pm -
Parallel Tempering and Adaptive Learning Rates in Restricted Boltzmann Machine Learning [Dekalog Blog]
It has been a while since my last post and in the intervening time I have been busy working on the code of my previous few posts. During the course of this I have noticed that there are some further improvements to be made in terms of robustness etc. inspired by this Master's thesis, Improved
- 9 years ago, 31 Mar 2016, 03:11pm -
Benchmarking Commodity CTAs [Quantpedia]
While much is known about the financialization of commodities, less is known about how to profitably invest in commodities. Existing studies of Commodity Trading Advisors (CTAs) do not adequately address this question because only 19% of CTAs invest solely in commodities, despite their name. We
- 9 years ago, 31 Mar 2016, 01:53pm -
How to Value Nadex Bull Spreads? [MKTSTK]
Exotic options have always been a hobby of mine. One of the curious things about Dodd-Frank was it started to push swap trading onto exchanges. As such, a cottage industry of exchange traded exotics (in the US they're technically swaps) has popped up over the last few years. The biggest of
- 9 years ago, 31 Mar 2016, 03:44am -
Trading the index with seasonal strategies [ENNlightenment]
I recently listened to an interesting interview at Better System Trader with Jay Kaeppel on Seasonality, a topic which I hadn’t done much backtesting on previously. Jay outlined 3 rules for constructing a seasonal trading strategy on the stock index: - Stay long the last 4 days and first 3 days of
- 9 years ago, 29 Mar 2016, 09:37pm -
A Monte Carlo Simulation function for your back-test results – in R [Open Source Quant]
In this post on bettersystemtrader.com, Andrew Swanscott interviews Kevin Davey from KJ Trading Systems who discusses why looking at your back-test historical equity curve alone might not give you a true sense of a strategy’s risk profile. Kevin Davey also writes on the topic here for
- 9 years ago, 29 Mar 2016, 02:22pm -
Machine Learning and Its Application in Forex Markets [Quant Insti]
In the last post we covered Machine learning (ML) concept in brief. In this post we explain some more ML terms, and then frame rules for a forex strategy using the SVM algorithm in R. To use ML in trading, we start with historical data (stock price/forex data) and add indicators to build a model in
- 9 years ago, 28 Mar 2016, 03:06pm -
Glamour Can Distract Investors [Larry Swedroe]
There’s very strong historical evidence to support the existence of a value premium in equity markets. While there’s no dispute over the existence of the value premium (value stocks have provided an annual average return 5% higher than growth stocks over the long term), there is much debate over
- 9 years ago, 28 Mar 2016, 01:12pm -
Best Links of the Week [Quantocracy]
These are the best quant mashup links for the week ending Saturday, 03/26 as voted by our readers: FX: multivariate stochastic volatility – part 2 [Predictive Alpha] Predicting Stock Market Returns—Lose the Normal and Switch to Laplace [Six Figure Investing] Momentum for Buy-and-Hold Investors
- 9 years ago, 27 Mar 2016, 01:51pm -
Momentum for Buy-and-Hold Investors [Dual Momentum]
There are many investors who prefer to remain invested in stocks at all times. Perhaps they think tactical allocation is some kind of voodoo. Maybe they have a strong psychological bias against occasional whipsaw losses and do not mind bear market drawdowns. Maybe they have institutional constraints
- 9 years ago, 25 Mar 2016, 02:26pm -
Momentum and Mean Reversion in Different Time Frames [Throwing Good Money]
In a recent blog post, I rather glibly stated that the market tends to revert to a mean. A reader called me out about the time frame I was using, which raises a good point. A market can tend toward both mean reversion and momentum over different time frames. Many traders would argue that different
- 9 years ago, 25 Mar 2016, 02:26pm -
Spikes Can Explain Returns [Larry Swedroe]
Recently there has been a lot of research on the question of whether higher moments of return other than volatility (specifically, the skewness of returns) helps to explain equity returns. (I’ve included a brief definition of skewness and a demonstrative example of it below.) For instance, the
- 9 years ago, 25 Mar 2016, 05:05am -
On Backtesting: An All-New Chapter from our Adaptive Asset Allocation Book [GestaltU]
If you've been a regular reader of our blog, you already know that we recently published our first book Adaptive Asset Allocation: Dynamic Portfolios to Profit in Good Times - and Bad. As of this writing, it still stands as the #1 new release in Amazon's Business Finance category.
- 9 years ago, 24 Mar 2016, 12:57pm -
The Comprehensive Guide to Stock Price Calculation [Quandl]
Adjusted stock prices are the foundation for time-series analysis of equity markets. Good analysts insist on properly-adjusted stock data. But the best analysts understand the adjustment process from first principles. This is Quandl's guide to the creation and maintenance of accurate adjusted
- 9 years ago, 24 Mar 2016, 12:57pm -
Markov Chain Monte Carlo for Bayesian Inference - The Metropolis Algorithm [Quant Start]
In previous discussions of Bayesian Inference we introduced Bayesian Statistics and considered how to infer a binomial proportion using the concept of conjugate priors. We discussed the fact that not all models can make use of conjugate priors and thus calculation of the posterior distribution would
- 9 years ago, 24 Mar 2016, 12:56pm -
Have benchmarks made us bad active investors? [Alpha Architect]
Obsession with short-term performance against market cap benchmarks preordains the dysfunctionality of asset markets. The problems start when trustees hire fund managers to outperform benchmark indexes subject to limits on annual divergence… Benchmarking causes, first, the inversion of the
- 9 years ago, 24 Mar 2016, 12:56pm -
Responding to Your Comments on Our Adaptive Asset Allocation Book [SkewU]
If you've been a regular reader of our blog, you already know that we recently published our first book Adaptive Asset Allocation: Dynamic Portfolios to Profit in Good Times - and Bad. As of this writing, it still stands as the #1 new release in Amazon's Business Finance category.
- 9 years ago, 24 Mar 2016, 12:56pm -
The Dynamic Duo Of Risk Factors: Part I [Capital Spectator]
The value and momentum factors have earned high praise in recent years as complementary sources of risk premia for designing and managing equity portfolios. AQR’s widely cited paper “Value and Momentum Everywhere” a few years back helped popularize the idea, pointing to applications in
- 9 years ago, 24 Mar 2016, 12:56pm -
A Few Notes On Adaptive Asset Allocation [CXO Advisory]
In the introductory text for Part I of their 2016 book, Adaptive Asset Allocation: Dynamic Global Porfolios to Profit in Good Times – and Bad, Adam Butler, Michael Philbrick and Rodrigo Gordillo state: “…we have come to stand for something square and real, a true Iron Law of Wealth Management:
- 9 years ago, 24 Mar 2016, 12:51pm -
Smart Beta Strategies in Australia [Quantpedia]
"Smart beta" investing is an alternative to the traditional active and passive approaches to funds management, whereby investors adopt a systematic method that provides exposure to factors that are argued to be related with expected returns at low cost. Therefore, the question of how smart
- 9 years ago, 24 Mar 2016, 12:50pm -
[Academic Paper] Optimal Delta Hedging for Options [@Quantivity]
The “practitioner Black-Scholes delta” for hedging options is a delta calculated from the Black-Scholes-Merton model (or one of its extensions) with the volatility parameter set equal to the implied volatility. As has been pointed out by a number of researchers, this delta does not minimize the
- 9 years ago, 24 Mar 2016, 12:50pm -
On the 60/40 portfolio mix [Eran Raviv]
Not sure why is that, but traditionally we consider 60% stocks and 40% bonds to be a good portfolio mix. One which strikes decent balance between risk and return. I don’t want to blubber here about the notion of risk. However, I do note that I feel uncomfortable interchanging risk with volatility
- 9 years ago, 24 Mar 2016, 03:44am -
Slides from Investing in Smart Beta Conference [Flirting with Models]
Justin spoke at the Investing in Smart Beta conference this week in Fort Lauderdale, FL. He spoke alongside Research Affiliates in a session titled "The Smart Beta Checklist: Choosing The Best Strategy & Risk/Return Profile For Your Portfolio." Here's a quick description:
- 9 years ago, 24 Mar 2016, 01:47am -
FX: multivariate stochastic volatility - part 2 [Predictive Alpha]
In part 2 our mean-variance optimal FX portfolio is allowed to choose from multiple models each week based on a measure of goodness (MSSE). The risk-adjusted return improves as a result with the annualized Sharpe Ratio rising to 0.86 from 0.49. In part 1 we estimated a sequential multivariate
- 9 years ago, 23 Mar 2016, 10:23am -
Server -IV- [Algorythmn Trader]
The previous post was about the auxiliaries to provide some basic interfaces, classes and messages. This post is about the 3rd project for our basic server solution. This project will allow to run the simple server and enable to connect a client. The RunServer project should be a WinForm project to
- 9 years ago, 23 Mar 2016, 10:22am -
Why Investors Should Combine Value and Momentum [Alpha Architect]
In the past we have discussed how to combine value and momentum strategies to improve an equity allocation. In this piece we discuss why an investor should combine use value and momentum.* Many investors recognize that stand-alone value and momentum strategies have historically worked. Of course,
- 9 years ago, 22 Mar 2016, 02:47pm -
The More Unique Your Portfolio, The Greater Its Potential [Investor's Field Guide]
If there is a lot of overlap between your portfolio and the market, there is only so much alpha you can earn. This is obvious. Still, when you visualize this potential it sends a powerful message. Active share—the preferred measure of how different a portfolio is from its benchmark—is not a
- 9 years ago, 22 Mar 2016, 02:47pm -
Beware bad multi-factor products [Flirting with Models]
This post is available as a PDF here. Summary Multi-factor portfolios are a great way to diversify across multiple factors that can potentially create excess risk-adjusted returns while simultaneously smoothing out relative performance volatility. There are two ways we've seen manufacturers
- 9 years ago, 21 Mar 2016, 02:46pm -
When Trading Detracts From Alpha [Larry Swedroe]
As explained in my latest book, “The Incredible Shrinking Alpha,” which I co-authored with Andrew Berkin, accompanying the rapid growth of the actively managed mutual fund industry, the average performance of mutual funds has been trending downward over the past few decades. Teodor Dyakov, Hao
- 9 years ago, 21 Mar 2016, 02:46pm -
Best Links of the Last Two Weeks [Quantocracy]
The best quant mashup links for the two weeks ending Saturday, 03/19 as voted by our readers: How to Learn Advanced Mathematics Without Heading to University - Part 1 [Quant Start] When Measures Become Targets: How Index Investing Changes Indexes [Investor's Field Guide] Meet the DIY Quants Who
- 9 years ago, 21 Mar 2016, 02:44am -
Predicting Stock Market Returns—Lose the Normal and Switch to Laplace [Six Figure Investing]
Everyone agrees the normal distribution isn’t a great statistical model for stock market returns, but no generally accepted alternative has emerged. A bottom-up simulation points to the Laplace distribution as a much better choice. A well-known problem in financial risk assessment is the failure
- 9 years ago, 20 Mar 2016, 01:52pm -
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
- 9 years ago, 19 Mar 2016, 11:58pm -
Price Breakout with NR7 | Trading Strategy (Setup & Entry) [Oxford Capital]
I. Trading Strategy Developer: Toby Crabel (Setup: NR7 Pattern); Laurence A. Connors, Linda B. Raschke (Entry: Price Breakout with NR7). Source: (i) Crabel, T. (1990). Day Trading with Short Term Price Patterns and Opening Range Breakout. Greenville: Traders Press, Inc; (ii) Laurence A. Connors,
- 9 years ago, 19 Mar 2016, 11:58pm -
Free Resources to Learn Machine Learning for Trading [Quant Insti]
While being a vibrant subfield of computer science, machine learning is used for drawing models and methods from statistics, algorithms, computational complexity, control theory and artificial intelligence. It focuses on efficient algorithms for inferring good predictive models from large data sets
- 9 years ago, 18 Mar 2016, 02:49pm -
Don’t Bother Timing Premiums [Larry Swedroe]
Because of the magnitude, persistence, pervasiveness and robustness of their related premiums, several factors have dominated the academic literature. Among them are market beta, size, value, momentum and profitability. However, despite their persistence, each factor has undergone even fairly long
- 9 years ago, 18 Mar 2016, 02:48pm -
EP 064: The casino edge, mean reversion strategies, and how to develop robust trading systems w/ Nick Radge [Chat With Traders]
For this episode I spoke with returning guest Nick Radge, who was originally on episode number 4. But in case you missed it; Nick is a systematic trend follower and momentum trader, most active in Australian and US equity markets. This time around, we discussed mean reversion strategies and why they
- 9 years ago, 17 Mar 2016, 04:10pm -
Meet the DIY Quants Who Ditched Wall Street for the Desert (h/t @AbnormalReturns)
In the high desert plain of New Mexico, Roger Hunter monitors automated trades on hog futures and currency pairs. Roger Hunter in his home office. Roger Hunter in his home office. Photographer: David Paul Morris/Bloomberg Four computer screens display a dizzying array of price charts and program
- 9 years ago, 17 Mar 2016, 04:09pm -
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