Quant Mashup Better Tests with Oversampling [Financial Hacker]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(...) Another Look At Thanksgiving Week [Quantifiable Edges]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(...) Best Links of the Week [Quantocracy]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(...) Recent Readings and New Directions [Dekalog Blog]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(...) Interview with Jay Kaeppel [Better System Trader]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(...) Relationship Between Growth & Momentum [John Orford]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(...) Bring More Data [Dual Momentum]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(...) Trend Following and Momentum Strategies for Global REITs [Alpha Architect]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(...) And Even More Evidence of Acceleration being Predictive [Factor Wave]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(...) Stock Returns Around Thanksgiving [CXO Advisory]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(...) An Awesome Collection of Quant Books from Quantocracy [Quantocracy]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(...) A Classic Factor Model Improves [Larry Swedroe]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(...) Daily Academic Alpha: Solving the Idiosyncratic Volatility Puzzle [Alpha Architect]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 [John Orford]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(...) Time-Varying Conditional Market Exposures of the Value Premium [Quantpedia]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(...) SPX Straddle - Backtest Results Summary - Part 2 [DTR Trading]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(...) Random data: Random wanderings in portfolio optimisation [Investment Idiocy]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(...) Bond Performance when Interest Rates Spike [Alpha Architect]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(...) The Mean Reversion Case For (and Against) Strong Future Returns [EconomPic]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 on Value Investing and Investor Overreaction [Alpha Architect]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(...) Acceleration and Momentum [Factor Wave]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(...) How the Number of Firms and Holding Periods Affect Momentum Funds [Alpha Architect]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(...) David Versus Goliath [Investment Idiocy]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(...) Two Unfilled Down Gaps For SPY — Good News? [Quantifiable Edges]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(...) Searching for an Efficient Market Regime Filter [Helix Trader]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,(...) Can We Tell Who Trades on Which Dark Pools? [Mechanical Markets]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(...) Best Links of the Week [Quantocracy]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(...) Unsupervised candlestick classification for fun and profit – part 2 [Robot Wealth]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(...) Interview with Thomas Stridsman [Better System Trader]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 plot in Python [Smile of Thales]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(...) Santa Claus is Coming to Town (I Hope!!) [Jay On The Markets]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)(...) Review: Inovance's TRAIDE application [QuantStrat TradeR]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(...) CDS Inferred Stock Volatility [MathFinance.cn]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(...) Does sector momentum outperform stock momentum? [RRSP Strategy]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(...) Value+Momentum+Asset Allocation=A Powerful Strategy [Capital Spectator]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(...) SPX Straddle - Backtest Results Summary [DTR Trading]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(...) Does My Tail Look Fat in This? Part 1 [Cantab Capital]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(...) Momentum On Dual Momentum Portfolios [Quants Portal]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(...) Hi-Lo Index as a Market Timing Indicator [Alvarez Quant Trading]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(...) Valuation Metrics In Perspective [Larry Swedroe]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(...) Pros and Cons of New Technology-enabled Indexes [CXO Advisory]What are pros and cons of extending the definition of financial index beyond conventional market capitalization (buy-and-hold) weighting? In the October 2015 draft of his paper entitled “What Is an Index?”, Andrew Lo proposes that any portfolio satisfying three properties should be considered an(...) Deconstructing the Time-Series Momentum Strategy [Quantpedia]Moskowitz, Ooi, and Pedersen (2012) show that time series momentum delivers a large and significant alpha for a diversified portfolio of various international futures contracts over the 1985 to 2009 period. Although we confirm these results with similar data, we find that their results are driven by(...) Correlation and correlation structure (3), estimate tail dependence using regression [Eran Raviv]What is tail dependence really? Say the market had a red day and saw a drawdown which belongs with the 5% worst days (from now on simply call it a drawdown): weekly SPY returns One can ask what is now, given that the market is in the blue region, the probability of a a drawdown in a specific stock?(...) Random data: Evaluating [Investment Idiocy]Everyone hates drawdowns (those periods when you're losing money whilst trading). If only there was a way to reduce their severity and length.... Quite a few people seem to think that "trading the equity curve" is the answer. The basic idea is that when you are doing badly, you reduce(...) How Monday’s Strong Drop May Be Setting SPX Up For A Bounce [Quantifiable Edges]When a market has already sold off for multiple days and the selling accelerates that can often mark a point where a bounce becomes likely. Monday’s selling triggered the Quantifinder study below. All stats are updated. 2015-11-10 image1 These results appear extremely compelling. The consistency(...) Making Time (Even More of) an Investor's Best Friend [EconomPic]Ben Carlson of A Wealth of Common Sense blog (and author of a great book by the same name), had a recent post Playing the Probabilities outlining that time has been an investor's best friend (for those investors that have had in some cases quite a bit of time), pointing to the following table.(...) I bought corporate bonds and all I got was this stupid currency exposure [Flirting with Models]Summary In the current “Fed on / Fed off” market environment, dollar exposure matters Currency hedged exposures have exploded in popularity in the equity space Using the experience of Canadian investors, we demonstrate the large impact that currency can have on fixed income Investors buying(...) A Filter Selection Method Inspired From Statistics [QuantStrat TradeR]This post will demonstrate a method to create an ensemble filter based on a trade-off between smoothness and responsiveness, two properties looked for in a filter. An ideal filter would both be responsive to price action so as to not hold incorrect positions, while also be smooth, so as to not incur(...) Build Better Strategies! [Financial Hacker]Enough blog posts, papers, and books deal with how to properly optimize and test trading systems. But there is little information about how to get to such a system in the first place. The described strategies often seem to have appeared out of thin air. Does a trading system require some sort of(...) The World's Longest Trend-Following Backtest [Alpha Architect]Were in the middle of an academic research project and we ran a simple long-term trend-following model from January 1, 1801 to September 30, 2015. Recently, there has been some research on the performance of trend rules over long periods here (and highlighted by CXO here). Our trend-following(...)