In the previous set of articles (Parts 1, 2 and 3) we went into significant detail about the AR(p), MA(q) and ARMA(p,q) linear time series models. We used these models to generate simulated data sets, fitted models to recover parameters and then applied these models to financial equities data. In

Authors: Breedon, Rime, Vitale Title: Carry Trades, Order Flow and the Forward Bias Puzzle Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2643531 Abstract: We investigate the relation between foreign exchange (FX) order flow and the forward bias. We outline a decomposition of the forward

This is the first article in a series where we will look at the performance of selling at-the-money (ATM) options straddles. For background on the setup for the backtests, as well as the nomenclature used in the charts and tables below, please see the introductory article for this series: Option

Robust Gaussian Filtering

For the last 6 months I have been focused on the process of building the full technology stack of an automated trading system. I have come across many challenges and learnt a great deal about the two different methods of backtesting (Vectorised and Event driven). In my journey to building an event

In pair trading, usually a pair of stocks is traded in a market neutral strategy, i.e. it doesn’t matter whether market is trending upwards or downwards, the two open positions for each stock hedge against each other. To be able to pair trade, the key challenges are to: Choose a pair which will

In my previous post I demonstrated how a risk parity portfolio could be calculated numerically using a Newton method. However, the more common problem is to be able to set risk budget constraints as opposed to having equal risk. We can do this with PCTR constrained optimization by setting PCTR

"Taking less risk than is optimal is not safer; it just locks in a worse outcome. Taking more risk than is optimal also results in a worse outcome, and often leads to complete disaster." -- Aaron Brown, Red Blooded Risk (2011) In our new white paper, we explore how tactical strategies can

The best quant mashup links for the week ending Saturday, 09/12 as voted by our readers: Book Review: DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth [Dual Momentum] Hypothesis-Driven Development Part II [QuantStrat TradeR] Trend Followers Make Forecasts [Price Action Lab]

Today is the big day. My book Systematic Trading - A unique new method for designing trading and investing systems is officially released (although some people who ordered the ebook may already be reading it). Here is a picture of my new "baby": Even in this age of technology there is

k-Shape: Efficient and Accurate Clustering of Time Series

Factor analysis has taken the professional consultant world by storm and we are slowly seeing this analysis being used more and more by sophisticated retail investors and investment advisors. And that’s great–factor analysis is a great tool. In fact, we discuss the use of the tool and how it is

I've been thinking more about technical analysis. Not so much how to do it, but more about what it actually is. Some of it can be tested scientifically, but a lot can't (for more on this distinction refer to the excellent book by David Aronson, "Evidence-Based Technical Analysis:

Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum. Antonacci’s book, Dual Momentum Investing: An Innovative Strategy for Higher

This post will show how to use Monte Carlo to test for signal intelligence. Although I had rejected this strategy in the last post, I was asked to do a monte-carlo analysis of a thousand random portfolios to see how the various signal processes performed against said distribution. Essentially, the

In this blog post, I will present some backtest results on volatility models. The list I present here are not exhaustive and there are still a gargantuan set of papers focusing on this issue (a good place to start is on vlab [s.o to @neighbourlybear for showing me this]). In the next section, I

Nobody can deny a simple empirical fact: higher fees are associated with lower returns, on average (Here is a great paper by Ken French on the costs of active investing). This finding, logically, leads investors to focus on low-cost solutions as opposed to high-cost solutions, all else equal. But do

Yesterday I discussed Tuesday’s Follow Through Day (FTD) and some possible implication based on breadth and volume statistics. Wednesday was interesting because we saw a big selloff immediately follow Tuesday’s FTD. Past occurrences of this have been somewhat rare, but also somewhat suggestive

Officially end my exams on 28 Aug 15. Since I started a year back, I have learnt so much about finance, although I still think it’s not enough. In my opinion, I think there are 2 main school of thoughts in finance. One track is about trying to come out with models and price a certain financial

Its somewhat shocking to think about, but the mathematical underpinnings of modern finance have existed since at least 1898 when an obscure french mathematician Louis Bachelier was first getting started on what would become known as random walks. The two centuries prior to Bachelier witnessed the

VIX mean reversion trade gets popular when the market experiences big ups and downs. You hear a lot of talks about how much money people make from trading VXX, XIV and their leveraged equivalents. However, is VIX truly mean reverting, or it seems more lucrative than it is just because people only

Using a large dataset of news releases, we study instances of investors’ mistaken reaction, or misreaction, to news. We define misreaction as stock prices moving in the direction opposite to the news when it is released. We find that news tone predicts returns in the cross-section only upon the

One notable bit of evidence that emerged on Tuesday was the fact that it qualified as an IBD Follow Through Day (FTD). I have done a lot of research on FTDs over the years. Much of that research can be found on the blog. Here is a link. http://quantifiableedges.com/category/ibd-follow-through-day/ A

This post will evaluate signals based on the rank regression hypotheses covered in the last post. The last time around, we saw that rank regression had a very statistically significant result. Therefore, the next step would be to evaluate the basic signals — whether or not there is statistical

Jesse Livermore of the always interesting Philosophical Economics outlines the case for writing puts in his recent post The World’s Best Investment For the Next 12 Months. Given this has been an area of focus for me professionally for the better part of the last 5 years (sneak preview... I love

In a situation where you wish to determine the returns on an investment, one may have all the expertise to do this but without certain information (missing pieces) it would not be possible to derive to a conclusive figure. In practical terms “assume you have the value of all returns of all assets

The SPDR S&P 500 ETF “SPY” fell more than 6% in August Measured against other monthly returns, August 2015 was the worst month since 2012 “Monthly” returns are arbitrary and skew our understanding of market moves Since 2012, there have been several -6%, or near -6%, return periods

Authors: Lambert, Fays, Hubner Title: Size and Value Matter, But Not the Way You Thought Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2647298 Abstract: Fama and French factors do not reliably estimate the size and book-to-market effects. We demonstrate inconsistent pricing of those

I have always looked favorably upon do-it-yourself investing (DIY). It was a prominent feature of my own book. So I’ve been looking forward to DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth by Wes Gray, Jack Vogel, and David Foulke (GVF), the managing members of Alpha

One of my former studies I looked at over the weekend examined how the market performed following large selloffs before U.S.-only three day weekends. These include Labor Day, Martin Luther King Day, Presidents’ Day, Memorial Day, and Fourth of July. Since 2000 there have been 12 instances where

How much influence do investors have over their portfolios? Perhaps it's less than commonly assumed. The notion that randomness plays a role in money management has been widely studied in finance-Nassim Taleb's popular treatment in Fooled by Randomness: The Hidden Role of Chance in Life

A positive return for the State of Trend Following index, bringing the YTD performance nearly exactly on neutral level. The big spike up seen in the last part of the month, which brought the index close to +10%, was short-lived. The index quickly reverted it with a quick spike down. Please check

Frugal Fran is a 25-year old investor at the beginning of her career making $40,000 per year. Financially savvy, she has already started planning for her retirement. She plans to retire at age 65 and follow an "own your age" policy for her stock/bond mix. Fran projects a salary increase of

Robeco: Expected Returns 2016 - 2020 (via @ZipperTheory)

“It has been a cruel summer for one of the trendiest, most innovative investment strategies of the asset management industry”. This quote was taken from an article last week in the FT. • Title: Risk parity funds suffer a cruel summer • Author: Robin Wigglesworth • Source: Financial Times

This is the third and final post in the mini-series on Autoregressive Moving Average (ARMA) models for time series analysis. We've introduced Autoregressive models and Moving Average models in the two previous articles. Now it is time to combine them to produce a more sophisticated model.

Large institutions deal with immense amounts of currencies which enter and leave their accounts on a daily bases. Furthermore they have their own funds that it has to efficiently allocate so as to maximize their return on investment but also wish to hedge against adverse events. With a certain

Michael Himmel is a Founding Partner, Portfolio Manager and Director of AI Research for Essex Asset Management. He has been actively trading and designing systems since the 1980s, managing the No.1 Global Macro Hedge fund in the world in 1999. He now uses large doses of AI and Machine Learning in

The best quant mashup links for the week ending Saturday, 09/05 as voted by our readers: Announcing the Release of My New Book [Price Action Lab] VIX Trading Strategies in August [Volatility Made Simple] Systems building – Checks and balances [Investment Idiocy] Counter-Intuitive Facts About

Acceleration Effect and Gamma Factor in Asset Pricing (improved Momentum)

Almost all calculations in finance involve using log returns rather than % returns. There are a number of reasons why log returns are preferred. Estimating beta doesn’t seem like a special case. But when you go through the math, something doesn’t quite add up.

Benford's Law states that in many naturally occurring groups of numbers, the small digits are seen disproportionately often. This is often applied to the leading digits of data but it is more general than that. This was first noticed by the astronomer Simon Newcomb (who also should be famous

Light is the most precious resource to a photographer, everything you can do with your camera is budgeted by the amount of light available. Financial analysis is similarly constrained by the amount of data available. So more available data is always good. With Big 'O' Sharpe you can

I’ve replicated the following academic paper from my favourite journal; • Title: Nonlinear support vector machines can systematically identify stocks with high and low future returns • Authors: Ramon Huerta, Fernando Corbacho, and Charles Elkan • Journal: Algorithmic Finance (2013) 45-58 45,

This post will begin to apply a hypothesis-driven development framework (that is, the framework written by Brian Peterson on how to do strategy construction correctly, found here) to a strategy I’ve come across on SeekingAlpha. Namely, Cliff Smith posted about a conservative bond rotation

I have shown the study below a several times in the past, but not for a while. It examines the recent performance in the overnight futures market on nights the Employment Report has been released since the summer of 2012. The Employment Report is released at 8:30 AM Eastern (normally the 1st Friday

August 2015: Trend Following UP +2.36% — YTD: +8.94% The Summer bounce seen last month continued in August, with a positive monthly return pushing the YTD performance further up in the black. The last ten days of the month saw two strong days taking the index close to a +10% return, followed by

It seems reasonable that institutional trades could influence stock returns. Any large trades will move prices. In fact, a fairly common trading strategy is to try to detect the presence of large institutional trades in order to piggy-back on the flow. Also, large institutions have access to a lot

#14 - Momentum Effect in Stocks #25 - Small Capitalization Stocks Premium Anomaly Authors: Schmidt, Von Arx, Schrimpf, Wagner, Ziegler Title: Size and Momentum Profitability in International Stock Markets Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2642185 Abstract: We study the link

Over the last six blog posts we looked at the backtest results for over 13,700 options strangles sold on the Russell 2000 Index (RUT). Eight different exit approaches were tested on these strangles, including: Strangle (100:50) - exit if the trade has a loss of 100% of its initial credit OR if the