In the previous article we discussed Monte Carlo methods and their implementation in CUDA, focusing on option pricing. Today, we take a step back from finance to introduce a couple of essential topics, which will help us to write more advanced (and efficient!) programs in the future. In subsequent

#12 - Pairs Trading with Stocks #55 - Pairs Trading with Country ETFs Authors: Leung, Li Title: Optimal Mean Reversion Trading with Transaction Costs and Stop-Loss Exit Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2222196 Abstract: Motivated by the industry practice of pairs trading, we

I've seen studies in the past that suggest that there's an optimal day of the week to trade. One well know trader in particular, Larry Williams (famous for trading $10K to $1.1 mill in a single year with real funds in a global trading competition) , discusses

I'm often asked by individuals in high-school or sixth-form (for those of us in the UK!), as well as those contemplating heading back to university, as to what the most appropriate degree course is to take in order to become a quant. If I had to pick one course to cover all aspects of quant

My other half and I are considering moving to Beijing. The big smoke. A polluted day is the equivalent to between one sixth and 21 cigarettes per day. I don't smoke, but I'd rather a regulated cigarette than a week of breathing polluted air. Nevertheless the analogy is helpful.

One of the most problematic areas of quantitative trading is optimising a forecasting strategy to improve its performance. Seasoned quant traders realise that it is all too easy to generate a strategy with stellar predictive ability on a backtest. However, some backtests can mask the danger of an

Univariate Volatility Forecast Evaluation Regression based test - Mincer Zarnowitz regression Pairwise Comparison - Diebold Mariano test Jarque-Bera test References and credits Why this post? Open-source software is constantly evolving and improving. Code related to some of my previous posts is not

Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not

I will be speaking at the 2015 Australian Technical Analysts Association on May 15 to 17, 2015. My topics are “The development of an S&P500 stock weekly rotation strategy” and “From Internet Article to Trading Strategy: An ETF Monthly Rotation Strategy.” For more information about the

This is a test of another “Volatility Risk Premium” (VRP) strategy from the always excellent Trading the Odds (1). The strategy is similar to the Brute Force VRP, DDN’s VRP, and original TTO’s VRP strategies that we’ve shared previously in that it compares implied and historical volatility

Just few days ago stock.nu published a post with charts showing that empirical distribution of daily lows follows a U-shaped pattern, i.e. daily low is not equally likely to happen at any time during the trading day, rather low is more likely to occur near the open or the close. Similar (symmetric)

There’s been some nice posts on randomness the last week or so, in particular here and here. I would like to look at how we can use simulations to get a better understanding of how some aspect of a trading system holds up relative to a bunch of random trades. In this example, I look at entries on

Beware of focusing an investment decision on "yield." In this piece we want to highlight that investing in high dividend yield stocks--without considering the valuation--is probably a BAD idea. We've noticed that many market participants point to the historical performance of high

The Sharpe of a Meb-Faber-esque Timing model over the whole of the last 10+ years has been 1.12. Of course that doesn't tell the whole story. You can see the wild swings. So there it is. A timing model whose S

Extended pattern in US Dollar warns of regime shift $UUP

3 year high for $NYUD: significant money flow, especially into large caps: https://rrspstrategy.wordpress.com/charts/ Statistics for last 3 years 1 month return after $NYUD > 500 1.8% 1 month return (all) 1.2%

My last post dealt with the characteristics and the potential usefulness of the aggregate social media sentiment in the U.S. stock market. As we know, social media is only one of the many possible proxies of the investor mood. I will look below at some of the alternative indicators from a

When it comes to managing a portfolio of stocks versus a benchmark the problem is very different from defining an absolute return strategy. In the former one has to hold more stocks than in the later where no stocks at all can be held if there is not good enough opportunity. The reason for that is

Backtesting is a very important step in strategy development. But if you have ever went through the full strategy development cycle, you may have realized how difficult it is to backtest a strategy properly. People use different tools to implement a backtest depending on their expertise and goals.

Statistics for daily low and where its been located during intraday in the last 2 years. First graph is divided into hours and presents frequency and percentage. Big picture has three graphs on same row and it is in 5 min interval and begins with Frequency, Percentage and CDF. First row All

#44 - Paired Switching Authors: Schizas, Thomakos Title: Market timing using asset rotation on exchange traded funds: a meta-analysis on trading performance Link: http://businessperspectives.org/journals_free/imfi/2013/imfi_en_2013_02cont_Schizas.pdf Abstract: The ultimate goal of any “paper”

Along with the Sharpe Ratio, the drawdown of a trading strategy is one of the most common indicators you will see used to evaluate its performance. The drawdown is simply the decline in value of a strategy at a point in time since a previous high. It's important as it gives you an indication of

We use a comprehensive dataset from a German discount brokerage firm to investigate both the prevalence and effects of moving average trading heuristics among individual investors. We document an abnormal increase of 30% in individuals’ trading volume on signal days. More than one in 10 investors

One of the top Google “rebalance free lunch” results is an article quoting one of the brightest minds in finance, Clifford Asness, that I think most investors would agree with: "Rebalancing is one of the few free lunches out there," said Clifford Asness, managing principal of New York

An interesting dichotomy is shaping up in the VIX complex. On one hand, the premium between VIX futures (30-day constant maturity) and the VIX spot stands at its highest level in more than 2 ½ years. That’s generally been a good thing for the inverse VIX play (ex. short VXX or long XIV), because

This paper singles out the key roles of US equity skewness and kurtosis in the hedge fund return generating process. We propose a conditional higher‐moment model with location, trading, and higher‐moment factors to describe the dynamics of the equity hedge, event‐driven, relative value, and

Are Bollinger Bands useful for specifying low and high levels of the overall U.S. stock market? In other words, can an investor beat a buy-and-hold strategy by systematically buying (selling) when the market crosses below (above) the lower (upper) Bollinger Band? To check, we examine the historical

A common criticism of Professor Robert Shiller’s famous CAPE measure of stock market valuation is that it fails to correct for the effects of secular changes in the dividend payout ratio. Dividend payout ratios for U.S. companies are lower now than they used to be, with a greater share of U.S.

One of the advantages of social media analytics is the ability to drill in to the investor sentiment about a particular company or instrument. But can we say something useful about the aggregate stock market based on the social media traffic about individual companies? And does the aggregate

We‘re happy to have been invited to host a presentation at the Silicon Valley Chapter of the American Association of Individual Investors on April 11, 2015. We obviously extend this invitation to whomever is around, join us for this first opportunity to meet in person. The presentation will

When risk analytic servers crashed I sent the newbie analyst out on a quixotic errand to get wads of pencils and notepads so we could Get bqck to work. Bringing back a grin. Pencils used to be a more serious business however. Pencils and Super Computers Feynman's autobiography describes how the

Momentum Crash Management (Mahdi Heidari) The Risk Anomaly Tradeoff of Leverage (Baker and Wurgler) 3 Factor Dual Momentum: Value, Momentum and Low Volatility (RRSP Strategy) Tactical Asset Allocation - Research Review (The Capital Spectator)

One of my Ph.D papers was published recently. It deals with yield curve forecasting. Here is the code for applying the Nelson-Siegel model to any yield curve: ? [Copy to clipboard] Download as.txt create_NS_residuals = function(dat, horiz = 12, initobs = 108, tau = 0.0609){ n = NROW(dat) fc =

How Often Should You Take Tactical Asset Allocation Decisions? Byeong-Je An, et al. March 5, 2015 About once a quarter. We compute optimal tactical asset allocation (TAA) policies over equities and bonds when both asset returns are predictable. By varying how often the weights are reset, we estimate

Similar to my rolling cumulative returns from last post, in this post, I will present a way to compute and plot rolling Sharpe ratios. Also, I edited the code to compute rolling returns to be more general with an option to annualize the returns, which is necessary for computing Sharpe ratios. In any

In this day and age, paralleling and mining big data, I like to think about the new complications that follow this abundance. By way of analogy, Alzheimer’s dementia is an awful condition, but we are only familiar with it since medical advances allow for higher life expectancy. Better abilities

This post looks at Factor* Dual Momentum with 3 factors: Value, Momentum and Low Volatility (or Betting against Beta). Previous posts covered 2 factors only. * long portfolios from the factors, rather than the long minus short factors themselves. Low … Continue reading

Rebalance frequency affects value and quality factors in different ways: Value works better when assessed more frequently Quality factors work about the same, regardless of frequently. Other important findings: Value portfolios outperform the market, historically. Quality portfolios perform inline

Related research paper has been included into existing free strategy review. #100 - Trading WTI/BRENT Spread Authors: Lubnau Title: Spread trading strategies in the crude oil futures market Link: http://econstor.eu/bitstream/10419/96520/1/783913591.pdf Abstract: This article explores whether common

In this piece, I’m going to do six things: First, I’m going to clarify the purpose of Total Return EPS, what it’s trying to accomplish–a topic that probably wasn’t addressed as clearly as it could have been in the prior piece. In a single sentence, the purpose of Total Return EPS is to

We recently examined a handful of metrics related to S&P 500 valuations. P/E P/B TEV/EBITDA TEV/FCF TEV/GP Details on these metrics can be found here. Let's look at the high level summary as of Februa

Streamgraphs provide a useful way to visualize the volatility for a large group of assets over time. You can think of a streamgraph as like a stacked line graph where the data radiates out around a central axis. The following chart plots the rolling 10 day volatility for the Nasdaq 100 plus SPY and

Once again today the Fed delivered just what the market needed to hear. Although the word “patient” was removed from the official statement, its removal was accompanied by dovish comments that tanked the greenback and just above everything else soared higher. Stocks reversed and moved sharply

My recent research has been in ETFs which I have not explored in several years. ETF sector rotation has always intrigued me. The idea seems so simple that it should work. Always be in the sector that has been doing the best. I like simple but does it work? If not, can we make it … C

In this post we will look at the results for a Momentum Rotation strategy that ranks funds based on the sum of two rate-of-change (ROC) values. We will use the same portfolio of ETFs discussed in Part 1 and Part 2 of this series. So far this series has started a number of good conversations, trying

A target price forecast scaled by current price provides the analyst’s assessment of the implied return to that stock over the stated forecast horizon. Using a simple valuation framework, we show that implied returns are a function of the expected dividend distribution, analysts’ private

How should financial education incorporate the experience of the 2007-2009 financial crisis? In their May 2014 publication entitled Investment Management: A Science to Teach or an Art fo Learn?, Frank Fabozzi, Sergio Focardi and Caroline Jonas summarize the current approach to teaching finance

Reports of my death have been greatly exaggerated ~Mark Twain Wow, it has been a while. Roughly four years have gone by since the my last post. It might seem like a long time for some, but coming out of college and hitting the ground running as a full-time trader made it seem like the blink of an

In the last post, we covered how to evaluate the profitability and risk of your strategy. Now let’s take a look at measuring the Statistical Significance, Stability, and Live Performance of your strategy. Statistical Significance

Tomorrow we may know a little more about the future course of interest rates when the Fed concludes its two-day meeting. They may choose to remain “patient” for additional data or they may be comfortable with what they already have and choose that nearly seven years of zero was enough and the