Quant Mashup 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(...) Unsupervised candlestick classification for fun and profit - part 1 [Robot Wealth]Candlestick patterns were used to trade the rice market in Japan back in the 1800's. Steve Nison popularised the idea in the western world and claims that the technique, which is based on the premise that the appearance of certain patterns portend the future direction of the market, is(...) [Academic Paper] Note on Correlation of First Differences of Averages in a Random Chain [@Quantivity]Note on Correlation of First Differences of Averages in a Random Chain [Academic Paper] Multi-Scale and Hidden Resolution Time Series Models [@Quantivity]Multi-Scale and Hidden Resolution Time Series Models [Academic Paper] Multi-scale Random Field Models [@Quantivity]Multi-scale Random Field Models [Academic Paper] Multi-Scale Stochastic Modeling of Dynamics of a Time-Averaged Variable [@Quantivity]Multi-Scale Stochastic Modeling of Dynamics of a Time-Averaged Variable Best Links of the Week [Quantocracy]The best quant mashup links for the week ending Saturday, 11/07 as voted by our readers: Using random data [Investment Idiocy] The Overnight Trading Anomaly in SPY and a Few Notes About Backtesting in R [Price Action Lab] GMO Flows Turn Negative – An Ominous Sign for Risk Taking [EconomPic] The(...) Interview with Laurent Bernut [Better System Trader]Laurent Bernut was a systematic short seller with Fidelity for 8 years. His mandate was to underperform the longest bear market in modern history: Japanese equities. Prior to that, he worked in the Hedge Fund world for 5 years. He now runs an automated Forex strategy and travels the world with his(...) Asynchronicity & Performance - 'JavaScript for Financial Analysts' Chapter 7 [John Orford]First draft of 'JavaScript for Financial Analysts' Chapter 7. ~ We are all waiting for something, and our computers are no different. Computers are built on four building blocks. CPUs, memory, hard disk and network. Our programs are only as fast as the slowest component. To put(...) [Academic Paper] Risk Premia: Asymmetric Tail Risks and Excess Returns [@Quantivity]Risk Premia: Asymmetric Tail Risks and Excess Returns [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(...)