This is the first article in a series where we will look at the backtest results of selling at-the-money (ATM) options straddles on the Russell 2000 index (RUT). In the prior series, we looked at the performance of this same strategy on the SPX. For background on the setup for the backtests, as well

Important preface: This post is in no way intended to showcase a particular trading strategy. It is purely to share and demonstrate the use of the framework I’ve put together to speed the research and development process for a particular type of trading strategy. Comments and critiques regarding

The enterprise multiple (EM) predicts the cross section of international returns. The return predictability of EM is similarly pronounced in developed and emerging markets and likewise strong among small and large firms. An international portfolio of low-EM firms outperforms a portfolio of high-EM

There are a number of ways to become more confident in the idea of factor investing. The simplest is to just compare the results of factor portfolios to those based on other methods. This will show outperformance but it won’t give us a reason for the outperformance. So anything that can give us

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

First draft of 'JavaScript for Financial Analysts' Chapter 9. ~ The web dominates our communication. The driver of this crushing victory? The humble webpage increasingly coupled with JavaScript. Up until now we have focused on the basics of how to code JavaScript in a functional manner,

I often read that valuations don't matter over the short-term (a case often cited against market timing). Over very short periods (hours, days, etc...) this certainly may be true, but while there can be a lot of variability around month-to-month or year-to-year performance, I completely

We test a frog-in-the-pan (FIP) hypothesis that predicts investors are inattentive to information arriving continuously in small amounts. Intuitively, we hypothesize that a series of frequent gradual changes attracts less attention than infrequent dramatic changes. Consistent with the FIP

The last few months have seen a flurry of activity in terms of new courses being created for the R programming language. Udemyis one such online venue that provides a surprisingly broad array of topics related to the R language. These topics include statistical analysis, regression, data science,

Summary Due diligence is an important practice in our industry – and one that should be ever-evolving. There are some questions we receive on due diligence questionnaires that are well intentioned, but we think can be improved. Finally, in doing due diligence, we think that after the question

The more data you use for testing or training your strategy, the less bias will affect the test result and the more accurate will be the training. The problem: price data is always in short supply. Even shorter when you must put aside some part for out-of-sample tests. Extending the test or training

Historically Thanksgiving week has shown some very strong tendencies. The table below is one I have shown a few times over the years. I decided to update it again this year. 2015-11-23 image1 Monday and Tuesday don’t show anything suggesting an edge. Monday’s total return was actually negative

The best quant mashup links for the week ending Saturday, 11/21 as voted by our readers: Unsupervised candlestick classification for fun and profit – part 2 [Robot Wealth] Searching for an Efficient Market Regime Filter [Helix Trader] How the Number of Firms and Holding Periods Affect Momentum

Since my last post I have been doing a fair bit of online research and fortunately I have discovered the following papers, which mesh nicely with what I am trying to do with Conditional Restricted Boltzmann Machines to model time series:- Deep Learning Architecture for Univariate Time Series

Jay Kaeppel has over 25 years experience in the financial markets. He has worked as the Head Trader for a CTA and published a number of popular trading books on Futures, Options and Stock Market Seasonality. He also spent a number of years writing a weekly column titled “Kaeppel’s Corner” and

Matt wrote me a while back about how thinking about Value and Growth lead you to Mean Reversion and Momentum. I like connections. Here's the line of reasoning. Value stocks are priced low by whichever definition you feel like using, but when investing in value stocks you are betting against the

Several months ago we posted an article called “Bring Data” where we showed the importance of having abundant data for system development and validation. This was further reinforced to us recently when someone brought us some additional U.S. stock sector data. Previously, we only had sector data

This study investigates whether the risk adjusted returns of a global REIT portfolio would be enhanced by adopting a trend following strategy (which is an absolute concept), a momentum based strategy (which is a relative concept and requires individual country allocations), or indeed a combination

In the last two posts I wrote about acceleration, where returns over consecutive periods are increasing. I’ve received several emails about the idea. These investors (with about 80 years of experience between them) really like the concept. It resonated with the way they saw the world. When looking

Does the Thanksgiving holiday, a time of families celebrating plenty, give U.S. stock investors a sense of optimism that translates into stock returns? To investigate, we analyze the historical behavior of the S&P 500 Index during the three trading days before and the three trading days after

Check out our new books section, curated by Jacques Joubert of Quants Portal. The backstory: I wanted to put together a collection of quantitative trading books as deep and wide as our quant mashup. The problem was that, because of my “get to the point” nature, my reading consists mostly of

There has been a great deal of focus by the academic community in recent years on fine-tuning the various factor models used to explain the differences in returns of diversified portfolios. Marie Lambert, Boris Fays and Georges Hubner contribute to the literature with their 2015 paper, “Size and

Kewei Hou and Roger Loh have a fun paper on the idiosyncratic volatility puzzle, which is set to be published in the Journal of Financial Economics. The idiosyncratic volatility puzzle is associated with the empirical evidence which suggests that stocks with higher idiosyncratic volatility

First draft of 'JavaScript for Financial Analysts' Chapter 8. ~~ As we saw in the previous chapter, doing things asynchronously is really appealing when you can pull it off elegantly. A bit like juggling, there's a lot going on, but a skilful juggler only ever interacts with one ball

Value strategies exhibit a large positive beta if contemporaneous market excess returns are positive, and a small beta if contemporaneous market excess returns are negative. Value also has a large positive beta after bear markets, but a small beta after bull markets. These facts hold for

When I posted my SPX Straddle Backtest Results Summary I didn't plan on writing a follow up article. But after that post I received several emails asking if I could present the SPX straddle results in a slightly different format. Basically tabular results in a structure similar to my iron

Everyone knows that the usual naive method of portfolio optimisation is, well, a bit rubbish. This isn't because the method is flawed, but it relies on the inputs being 100% accurate, or to put it another way we need to know precisely what the mean, volatility and correlation of future returns

The prediction of higher interest rates has been ongoing since the government went all-in on a variety of so-called “inflationary” efforts. Inflation hasn’t happened and rates are still low across the yield curve. So-called “bond vigilantes,” having been wrong for 7 years now and are still

Bull thesis: 15-year S&P annualized returns ending 9/30/15 came in at just under 4%. The average forward return since 1915 when returns were that level (or lower) was 15.5% annualized over the next 15 years with a standard deviation of only 2% Bear thesis: the 15-year starting point came when

David Dreman is a personal hero of mine. Years ago, I stumbled on his book, “Psychology and the Stock Market: Investment Strategy Beyond Random Walk,” which was originally published in 1977. It had a huge impact on me. It’s timeless, with lessons that still apply to value investing today. It

The momentum factor has been extensively studied. We know it predicts outperformance both in the absolute and in the cross section. Momentum has been studied in many markets and over extensive time periods. But a recent interesting paper instead looks at whether the change of momentum is a useful

We have already documented the returns to generic momentum investing strategies. Within the fund marketplace, many investors focus on fees and less on process. For example, Morningstar highlights the fees as “cost-efficient” for a specific momentum fund, MTUM. However, fees are only one part of

Just a quick post today. As most of you know until a couple of years ago I worked for a large systematic hedge fund. Now I manage my own money. I'm doing similar things (systematically trading futures, with a holding period averaging a few weeks, and a variety of trading rules with a trend

Both Thursday and Friday saw SPY leave an unfilled gap down. That is fairly unusual. In the study below I examined other times it has occurred since 2002 while SPY was below the 200-day moving average. 2015-11-16 image1 Every instance except one was higher five days later. While instances are a

The probability of our long term success as traders increases when we trade with the prevailing market trend. This means when trading stocks we should be buying when the overall market is rising and / or shorting when the overall market is falling. In order to filter trading opportunities therefore,

Marketplace transparency ensures that investors receive a fair price and have accurate data to conduct their research. But, transparency can also make it harder for traders to conceal their intentions from competitors and counterparties. Exchanges and regulators are tasked with balancing the

The best quant mashup links for the week ending Saturday, 11/14 as voted by our readers: Build Better Strategies! [Financial Hacker] A Filter Selection Method Inspired From Statistics [QuantStrat TradeR] Unsupervised candlestick classification for fun and profit – part 1 [Robot Wealth] Random

In the last article, I described an application of the k-means clustering algorithm for classifying candlesticks based on the relative position of their open, high, low and close. This was a simple enough exercise, but now I tackle something more challenging: isolating information that is both

Thomas Stridsman has over 20 years experience in the financial markets. He was an editor for Futures magazine and published two books on trading system development and money management. He is now a fund manager at Alfakraft, specialising in short-term trend following strategies with a focus on

Quandl is a platform that offers free and premium access to financial and economic data. On top of this the data export is supported by many languages and softwares such as R, C#, Matlab. You can find here an exhaustive list of environments. In the following you will find an illustration of how you

The renowned “Santa Claus Rally” is second only to “Sell in May” in generating a flood of articles from us “market analyst types”. But I haven’t seen too many Santa Claus Rally articles so far this year so I’ve decided to try to beat the crowd. Plus “rally time” is (hopefully)

This review will be about Inovance Tech's TRAIDE system. It is an application geared towards letting retail investors apply proprietary machine learning algorithms to assist them in creating systematic trading strategies. Currently, my one-line review is that while I hope the company founders

I have written a working paper on CDS (credit default swap) implied stock volatility and found some interesting results. Post it here just in case someone is interested. Both CDS and out-of-money put option can protect investors against downside risk, so they are related while not being mutually

A momentum strategy may be implemented at an individual stock level or sector level. Is there an advantage to partitioning stocks into sectors and owning the strongest sector versus buying the highest momentum stocks in the market? Stock momentum funds have been available for a few years and

In a new article from Institutional Investor—“Market Timing Is Back In The Hunt For Investors”–AQR Capital Management reviews the case for market timing and finds an encouraging track record. Citing the historical record from 1900, AQR’s Cliff Asness and two colleagues outline what is

Over the last 40+ blog posts we took a fairly detailed look at the backtest results of 28,840 short straddles on the S&P 500 Index (SPX). I provided a bit more detail in these 40+ posts than usual. While I didn't provide all of my analysis on the SPX short straddles, there was enough to

Investors and managers are concerned with "fat tails". In part one of a two part article we look at where fat tails come from and how they can be managed. Introduction “Extreme events”, “nonlinear dynamics”, “power laws”, “flash crashes”, “fractal processes”… a lot of

In the first section, this article describes a Dual Momentum study over an iShares country etfs basket with a new attempt to improve this well-known investing style. I chose iShares because it is the world largest family of Exchange Traded Funds (ETFs) from BlackRock. Although different stock

My strategies use a market timing indicator to tell me when I should not be trading the strategy. The blog post, Avoiding Stock Market Crashes with the Hi-Lo Index of the S&P500, presented a very simple idea of using new highs vs new lows. The post tests trading the SPY & IEF but I wanted to

It’s well-established in the literature that valuation metrics—such as the dividend yield (D/P) and the earnings yield (E/P), as well as its cousin, the Shiller CAPE 10—provide important information in terms of future expected returns. In fact, these metrics are the best that investors have