Quant Mashup [Academic Paper] Dynamics of Expected Returns: Evidence from Multi-Scale Time Series Modeling [@Quantivity]Dynamics of Expected Returns: Evidence from Multi-Scale Time Series Modeling [Academic Paper] Anchoring Adjusted Capital Asset Pricing Model [@Quantivity]Anchoring Adjusted Capital Asset Pricing Model [Academic Paper] Idiosyncratic Volatility, Momentum, Liquidity, and Expected Stock Returns in Developed and Emerging Markets [@Quantivity]Idiosyncratic Volatility, Momentum, Liquidity, and Expected Stock Returns in Developed and Emerging Markets [Academic Paper] Over or Under? Momentum, Idiosyncratic Volatility and Overreaction [@Quantivity]Over or Under? Momentum, Idiosyncratic Volatility and Overreaction Gap Pattern | Trading Strategy (Filter & Exit) [Oxford Capital]I. Trading Strategy Concept: Short-term momentum patterns with a trend filter. Source: Dahlquist, J. R., Bauer, R. J. (2012). Technical Analysis of Gaps. New Jersey: Pearson Education, Inc. Research Goal: Performance verification of the Gap Pattern. Specification: Table 1. Results: Figure 1-2. Trade(...) Screening Using False-Discovery Rates [Alex Chinco]1. Motivating Example Jegadeesh and Titman (1993) show that, if you rank stocks according to their returns over the previous 12 months, then the past winners will outperform the past losers by 1.5{\scriptstyle \%} per month over the next 3 months. But, the authors don’t just test this particular(...) Dividends An Illogical Preference [Larry Swedroe]A large body of literature examines whether managers of actively managed funds add value to their investors by generating abnormal returns. Unfortunately, not only do the vast majority fail to do so, but the evidence, as presented in my book, “The Incredible Shrinking Alpha,” demonstrates that(...) GMO Flows Turn Negative - An Ominous Sign for Risk Taking [EconomPic]I have a ton of respect for the way in which GMO manages money (their guts to be massively contrarian if that is their view) and I think their thought leadership is about as good as it gets in the industry. That said, I have long had an issue in the way in which they think about investor behavior(...) Daylight is Bad for Gold Stocks (Apparently) [Jay On The Markets]Well, at least as far as I can tell. To understand what I am talking about consider the following results generated using daily open/high/low/close data for ticker GDX (an ETF that tracks gold mining stocks). Figure 1 displays the cumulative $ gain/loss achieved by holding 100 shares of ticker GDX(...) Deconstructing the Low-Volatility Anomaly [Quantpedia]We study several aspects of the so-called low-vol and low-beta anomalies, some already documented (such as the universality of the effect over different geographical zones), others hitherto not clearly discussed in the literature. Our most significant message is that the low-vol anomaly is the(...) SPX Straddle - 80 DTE - Results Summary [DTR Trading]Over the last five blog posts we looked at the automated backtest results for 4040 options straddles sold on the S&P 500 Index (SPX) at 80 days-to-expiration (DTE). Eight different loss approaches were tested on these straddles. On top of these eight loss approaches, tests were conducted with no(...) The Trinity Portfolio [Meb Faber]We examined 15 famous asset allocation strategies in my last book Global Asset Allocation. (If you haven’t read it yet I’ll send you a free copy.) I would like to have included a lot more tactical ideas in the book but there is a constant struggle between keeping an idea/book simple, but(...) Accessing Bitcoin Data with R [Revolutions]I am not yet a Bitcoin advocate. Nevertheless, I am impressed with the amount of Bitcoin activity and the progress that advocates are making towards having Bitcoin recognized as a legitimate currency. Right now, I am mostly interested in the technology behind bitcoin and the possibility of working(...) Tactical Alpha in Theory and Practice (Part II): Principal Component Analysis [GestaltU]In Part I of this series, we explored Grinold's Fundamental Law of Active Management, and why the theory leads to misguided conclusions in the presence of asset correlations. In this article we will offer a primer on a useful tool for portfolio evaluation, Principal Component Analysis (PCA),(...) Using random data [Investment Idiocy]As you might expect I spend quite a lot of my time using real financial data - asset prices and returns; and returns from live and simulated trading. It may surprise you to know that I also spend time examining randomly created financial data. This post explains why. I also explain how to generate(...) 3 Common Backtesting Traps With Easy Solutions [Capital Spectator]Backtests have become the weapon of choice for rationalizing various forms of tactical asset allocation, which has become increasingly popular as a risk-management tool since the 2008 crash. The hazards of backtesting—studying how a strategy performed in the past–are well known, which leads some(...) An interesting look at the size anomaly [Alpha Architect]Many of you are probably aware of the paper from AQR entitled, “Size Matters: When you control for your junk.” We loved the title so much we considered it one of our Top 5 Geeky, Yet Funny, Economic Paper Titles. Of course, great papers often go unread beyond the abstract because they are a bit(...) False Discovery Rate [Henry Carstens]Good article on False Discovery Rate – the probability that a significant p-value indicates a true effect and one of the reasons that quant tests and systems generally underperform. For example, Market Stress and Market Stress Automations generally test out at around 85% wins. In real life they(...) Fetching options data from NASDAQ website with Python [Quant Corner]Below is a piece of Python code allowing to download option chains from NASDAQ website. It is basically a big main function relying heavily on BeautifulSoup and wrapped into a class (‘c’est chic’). User provides the ticker, expiry, option type, etc… and is returned option data for all(...) A Very Simple Model for Pricing VIX Futures [Six Figure Investing]Serious volatility watchers are always attending a three ring circus. The left ring holds the general market. Center ring has options on the S&P 500 and the various CBOE VIX® style indexes and to the right are VIX futures, Volatility Exchange Traded Products like VXX, UVXY, TVIX, and XIV plus(...) Statistics behind Pair Trading (II): Entry and Exit points [Quant Insti]In the previous post on this topic, we discussed the challenges and statistics involved in selecting a pair of stocks for statistical arbitrage. We understood how by using the co-integration tests we can say within a certain level of confidence interval that the spread between the two stocks is a(...) Strong Down Month for the State of Trend Following [Wisdom Trading]October 2015: Trend Following DOWN -9.19% - YTD: +3.36% A strong downward move at the beginning of the month weighed heavily on the index, which did not recover and went on to post its worst return of the year. The YTD performance is still in the black. Below is the full State of Trend Following(...) State of Trend Following in October [Au Tra Sy]The State of Trend Following index posted a strong negative return in October. Enough to take the YTD performance in the red, with another volatile oscillation around the neutral line for 2015. Please check below for more details. Detailed Results The figures for the month are: October return:(...) Ivy Portfolio November Update [Scott's Investments]The Ivy Portfolio spreadsheet track the 10 month moving average signals for two portfolios listed in Mebane Faber's book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Faber discusses 5, 10, and 20 security portfolios that have trading signals based on(...) [Academic Paper] Networks of Equities in Financial Markets [@Quantivity]Networks of Equities in Financial Markets [Academic Paper] Network Perspective of the Stock Market [@Quantivity]Network Perspective of the Stock Market [Academic Paper] Emergence of Statistically Validated Financial Intraday Lead-Lag Relationships [@Quantivity]Emergence of Statistically Validated Financial Intraday Lead-Lag Relationships [Academic Paper] Evolution of Worldwide Stock Markets, Correlation Structure and Correlation Based Graphs [@Quantivity]Evolution of Worldwide Stock Markets, Correlation Structure and Correlation Based Graphs [Academic Paper] Equity Returns at Turn of the Month [@Quantivity]Equity Returns at Turn of the Month Best Links of the Week [Quantocracy]The best quant mashup links for the week ending Saturday, 10/31 as voted by our readers: The Cold Blood Index [Financial Hacker] How to Write a Great Quant Blog [Quant Start] High Frequency Market Microstructure: Part 1 (Microstructure Noise) [Portfolio Effect] Buy the Winners [Systematic Relative(...) The Financial Hacker’s Cold Blood Index [Robot Wealth]This post builds on work done by jcl over at his blog, The Financial Hacker. He proposes the Cold Blood Index as a means of objectively deciding whether to continue trading a system through a drawdown. I was recently looking for a solution like this and actually settled on a modification of jcl’s(...) Extreme Divergence: Negative Equity Returns Ahead [Trader Edge]Many traders use technical and/or fundamental data, but few traders have discovered the unique benefits of using sentiment data in their investment process. Sentiment data attempts to quantify the emotional mood of investors and traders and can be used as a very effective contra-indicator. When(...) 10 Reasons to Use Elixir in Finance [John Orford]Elixir is the new hot programming language on the block. The bastard child of Ruby and Erlang. Syntax Ruby is designed like Apple designs phones. It looks and feels right. I love that the goal of Ruby language design is to reduce cognitive dissonance when implementing features. Everything has to fit(...) Hedge Fund Closet Indexing: 2015 Update [Alpha Beta Works]A fund must take active risk to generate active returns in excess of fees. However, some managers charge active fees but manage their funds passively. Managers also tend to become less active as they accumulate assets. This problem of hedge fund closet indexing is widespread. Over a third of capital(...) Experts Aren't Helpful, and Other Useful Lessons From "DIY Financial Advisor" [GestaltU]We draw a significant amount of inspiration for the material we cover on this blog from the publications of our financial brethren. Unfortunately, given the non-stop firehouse of information that increasingly characterizes the digital age, it’s nearly impossible to consume anything longer than a(...) High Frequency Market Microstructure: Part 1 (Microstructure Noise) [Portfolio Effect]Microstructure noise describes price deviation from its fundamental value induced by certain features of the market under consideration. Common sources of microstructure noise are: bid-ask bounce effect order arrival latency asymmetry of information discreteness of price changes Noise makes high(...) ‘Cycle Factor’ Can Predict Returns [Larry Swedroe]Anna Cieslak and Pavol Povala—authors of the paper “Expected Returns in Treasury Bonds,” which was published in the September 2015 issue of The Review of Financial Studies—examined the time variation in the risk premium that investors require for holding Treasury bonds. While most of the(...) All firms can benefit from the positive influence of women [Alpha Architect]Marisa Mayer’s recent announcement that she is again pregnant, and does not plan to take maternity leave after her twins arrive, has once again raised the age-old question about how far women have really come in making a gender equitable workplace. While women are undoubtedly making progress,(...) SPX Straddle - 73 DTE - Results Summary [DTR Trading]Over the last five blog posts we looked at the automated backtest results for 4160 options straddles sold on the S&P 500 Index (SPX) at 73 days-to-expiration (DTE). Eight different loss approaches were tested on these straddles. On top of these eight loss approaches, tests were conducted with no(...) US recessions, the Value Factor (HML) and current status [RRSP Strategy]The Fama-French value factor HML exhibits a fairly reliable 4 year cycle. Growth and Value out-performance oscillates with a 4 year period (see my previous post on this). Liew and Vassilou (1999), show that annual change in HML is related to future GDP change (see my blog post here). Therefore(...) What Exactly Does the VIX Tell Us? [EconomPic]Most investors know of the VIX Index, but not as many understand what information the VIX provides an investor. Here is my attempt to provide an initial outline of what it is and why the information embedded within the figure is so powerful. VIX Defined The CBOE has a white paper that provides a ton(...) Benchmark Oddities [Investor's Field Guide]Imagine two NBA teams. Team one starts Anthony Davis, Russell Westbrook, Stephen Curry, Kevin Durant, and James Harden. Team two starts Hassan Whiteside, DeMarcus Cousins, Brook Lopez, Marc Gasol, and Nikola Vucevic. Who wins? The two teams above determined by a stat called PER (player efficiency(...) 4 Types of Market Inefficiencies [Algo Trading 101]Generating trading ideas could be a frustrating process, especially so if there isn’t a structured framework for it. To assist us in our idea generation, we break down algorithmic trading ideas into 4 main categories. These 4 categories are essentially types of market inefficiencies. As mentioned(...) Influence of Correlations on Time-Series Momentum Strategies [Quantpedia]Trend-following strategies take long positions in assets with positive past returns and short positions in assets with negative past returns. They are typically constructed using futures contracts across all asset classes, with weights that are inversely proportional to volatility, and have(...) Why Sector Investing [Flirting with Models]I just came across a great post on sector investing by Dave Mazza, Head of Research for SSGA's ETF and mutual fund businesses. There is a lot of great information he walks through, but I thought there were three tidbits particularly interesting to us as risk managers. First, he points out that(...) How to Write a Great Quant Blog [Quant Start]Today's post is a guest post from Jacques Joubert, who runs QuantsPortal. Jacques emailed me recently and asked if I'd be willing to contribute to a post about how to get started in quant blogging. I was more than happy to do so, and Jacques wondered if it would make a good guest post for(...) Which Asset Allocation Weights Work the Best? [Alpha Architect]Okay, we're sold on a closet-indexing approach to the markets. Now we're investigating a variety of smart-beta products available in the market that weigh a large portfolio of stocks with some algorithm. But a natural question arises when trying to pick smart beta ETFs: What is the optimal(...) 5 Words on How To Write A Quant Blog [Quant at Risk]Do not commence working over your blog without the vision. “If you don’t know where you are going, any road will get you there!” You want to avoid that mistake. Spend some time dreaming of the final form of your site. Highly sought after content is important but not as much as your commitment(...) You do not experience summary statistics [Flirting with Models]In due diligence, we often evaluate summary statistics like annualized return, volatility, alpha, beta, up-capture, and down-capture. These statistics can unify years of returns into a single number. While this can be convenient for comparing different strategies, it fails to provide adequate(...) Buy the Winners [Systematic Relative Strength]People come up with all kinds of reasons not to buy stocks with strong momentum. Some of the most common reasons that I hear: Stocks with high momentum are risky Stocks with high momentum are overvalued Stocks with high momentum are susceptible to reversals As for the first point, yes, buying stocks(...)