A timely piece on S&P 500 put option prices. The authors find that S&P 500 put options get too expensive during wild times because of 2 effects: Demand for insurance sky rockets (investor utility demands safety) Supply for insurance becomes restricted (credit constraints cripple market

My Lazy PCA analysis tool plots returns against lagged returns and then fits principal components to the data. ('SP5HBI' S&P 500 High Beta index weekly) The surprising thing is that the fitted components almost always have a slope of plus or minus one (except when there's a lack

Last Friday the S&P 500 did something it hadn’t done in a very long time (949 trading days to be exact): it went down by more than 3% in a day. Nearly eight months ago we highlighted the length of this non-losing streak as it stood then at 787 trading days (the market seems to like palindromes

This post reviews the backtest results of selling one-lot options strangles on the Russell 2000 Index (RUT), initiated at 73 days-to-expiration (DTE). The results in this post were derived from 2312 individual trades entered by the backtester. The results are grouped by the delta of the short

Ahead of the upcoming Turn of the Month May/June, the statistics are always calculated after closing price and from year 1987 to 2014. This statistics applies only to Turn of the Month August/September. Last trading day of the month is -1 and the first trading day of the new month is 1. The trading

The best quant mashup links for the week ending Saturday, 08/22 as voted by our readers: The Kalman Filter and Pairs Trading [MKTSTK] The Gamblers’ Fallacy [Factor Wave] Strategy Gamma Overview [John Orford] The Health of Stock Mean Reversion: Dead, Dying or Doing Just Fine [Alvarez Quant Trading]

I. Trading Strategy Developer: Toby Crabel (ORBP: Opening Range Breakout Preference). Source: Crabel, T. (1990). Day Trading with Short Term Price Patterns and Opening Range Breakout. Greenville: Traders Press, Inc. Concept: Volatility expansion with a trend filter. Research Goal: Performance

Here's a cumulative return plot of the lazy Drop the Mic trading strategy outlined yesterday. Long periods of flatlining show when the strategy is in hibernation. Just for fun, here is how the strategy weights its holding in the S&P 500 over time. How often do you see a symmetric picture

Two of the most-well-known factors that help explain stock returns are the value effect (where equities with lower prices relative to metrics—such as book value, earnings, cash flow, sales and dividends—tend to outperform the equities with higher prices relative to those metrics), and the

Building on research in psychology, we predict that unpleasant weather negatively affects capital market participants’ moods and activity levels, causing a muted response to information events… The table below highlights that unpleasant weather seems to be correlated with slower market

One of the major themes of War and Peace will resonate with all practitioners of stochastic finance. Essentially, Napoleon's nemesis, the Russian general Kutuzov, keeps dropping back before the invading French until at last he spots a weakness in the French and pounces. Tolstoy tells us that

At the start of the week I wrote a post about the effect of weather and the markets. Leo Cheng thought (quite reasonably) that this might just be data mining. If you look at enough things, some will appear to have an influence on the market just by chance. I've done a little more reading and I

This post reviews the backtest results of selling one-lot options strangles on the Russell 2000 Index (RUT), initiated at 66 days-to-expiration (DTE). The results in this post were derived from 2336 individual trades entered by the backtester. The results are grouped by the delta of the short

This is somewhat based on an an article I wrote for the sadly departed "Active Trader" magazine but is more directly spurred by a conversation I had with a reader about my last post. Her point was that by buying dips we are just engaging in a classic Martingale, buying when things go

I was recently quoted in ETF.com and its sister publication, ETF Report, in an article titled Global Sector Investing in Early Stages. The article discusses global sectors – and in particular, global sector ETFs – and why they haven't seen the growth of their domestic peers. At Newfound, we

You can count dead air on the radio by the millisecond, when you expect to hear something but don't, your ears become acutely aware of not hearing anything at all. This doesn't happen with white space on a page. Look at a well designed website; your eyes will happily swim around it;

Investing in the current environment is difficult. Most, if not all, asset classes have high nominal prices, suggesting low nominal expected returns. Not exactly exciting. And for many investors who are retired and/or have near-term liquidity needs, investing in equity exposures–while necessary to

Given a constant speed, time and distance are fully correlated. Provide me with the one, and I’ll give you the other. When two variables have nothing to do with each other, we say that they are not correlated. You wish that would be the end of it. But it is not so. As it is, things are perilously

Passive Hedge Funds (via @carlfischer101)

My second post on this blog was a look at mean reversion, Is mean reversion dead? Given I am using a new data provider(Premium Data), it has been almost two years since that post and there have been other articles on this recently, I figured it was time to check again. The research will focus on

Yesterday I had a coffee with a person I have known for 20 years. He has worked as a quantitative analyst, a trader and a finance professor for at least as that long. He is one of the most knowledgeable people I know. When he says something it is worth listening. What he said was (roughly), "

We assume that the drift in the returns of asset prices consists of an idiosyncratic component and a common component given by a co-integration factor. We analyze the optimal investment strategy for an agent who maximizes expected utility of wealth by dynamically trading in these assets. The optimal

Dynamic Mode Decomposition for Financial Trading Strategies

Forecasting Stock Market Returns over Multiple Time Horizons

Volatility Forecast in Crises and Expansions

Imagine this scenario: you are a statistical arbitrage trader at a prop desk or HF. As such, you routinely hold an inventory of ETF exposure that you must hedge. The previous night, you instructed your overnight traders to calculate the hedge ratios for a matrix of ETF’s. The next morning before

The Quality factor is a composite measure designed to identify companies with the characteristics that typically lead to success. It is particularly useful to identify "value traps": companies which are cheap by current metrics but are losing money. I wrote a little about quality here.

July saw a bounce back up in the index after several months of downwards action. The YTD performance is still negative though. Please check below for more details. Detailed Results The figures for the month are: July return: 3.86% YTD return: -1.47% Below is the chart displaying individual system

Taking a leaf out of Mike Harris' recent Momersion theme, here's a PCA point of view of the balance between momentum and mean reversion over the previous 10 years from the Lazy PCA tool. August 2015 - 2014 PCA fits momentum and mean reversion components to the daily returns, they balance

In the last article we looked at random walks and white noise as basic time series models for certain financial instruments, such as daily equity and equity index prices. We found that in some cases a random walk model was insufficient to capture the full autocorrelation behaviour of the instrument,

Summary Rising interest rates are on the horizon … somewhere Yield curve dynamics – including the absolute level of rates, their direction of change, and the slope of the yield curve – all play an important role in the returns for managed futures The cost of carry in shorting fixed-income

The debate over passive versus active investing is akin to Eagles vs. Cowboys or Coke vs. Pepsi. In short, once our preference for one style over the other is established, it becomes a proven fact or incontrovertible reality in our minds. This post is not meant to convert a passive investor into an

The Monte Carlo, filled with a lot of mystery is defined by Anderson et al (1999) as the art of approximating an expectation by the sample mean of a function of simulated variables. Used as a code word between Stan Ulam and John von Neumann for the stochastic simulations they applied to building

Economics 101 tells us that people have 'convex' utility curves. Which means there are diminishing returns to having more, but losing what you currently have diminishes your well being precipitously. Convexity is such a human property, it shows up again and again in unexpected places.

It should be fairly obvious to anyone who has been involved with investing for any time, that traders decisions are heavily influenced by their mood. Actually, some interesting recent research has shown that people generally make decisions intuitively before using their conscious thought processes

This post reviews the backtest results of selling one-lot options strangles on the Russell 2000 Index (RUT), initiated at 59 days-to-expiration (DTE). The results in this post were derived from 2312 individual trades entered by the backtester. The results are grouped by the delta of the short

On the show this week we have Larry Williams who has been trading futures and stocks for over 50 years. In 1987 he won the world cup trading championship, turning $10,000 in to over $1.1 million in 12 months, that's a cool 11,000% return and the highest return to ever be achieved in that

Grabbing the data. How do you grab the latest news on your favorite ticker symbol? It all starts with the following URL. https://www.google.com/finance/company_news?q=SPY&output=rss You'll want to change "q=SPY" to whatever symbol you're interested in. You can add something

The best quant mashup links for the week ending Saturday, 08/15 as voted by our readers: Bring Data [Dual Momentum] Absolute Strength Momentum: Guley And Petkova (2015) [Flirting with Models] Adjusted Vs. Unadjusted Data [Price Action Lab] Vectorised Backtest in R [Quants Portal] Mojito 3.0 Strategy

About a month ago I started to answer a reader's question about stock splits. I was initially diverted by the "low price effect" and then forgot to revisit the topic. In addition to the fact that a split reduces the price, it is also a distinct event and we can study the dynamics of

When I lived in New York, every other night I'd have a drink with our head of financial engineering. Beer in the winter, G&Ts in the summer. In any case once he was telling me how in Japan even ordering coffee was tricky, because the Japanese didn't want to cause offence by not knowing

Having your cake and eating it too is a great way to go. It’s great to have the cake, and it’s also great to eat the cake. But you can’t have it both ways. This trend continues when we speak with fellow investors: “Give me high, after-tax, net of fee returns, but with limited risk and

Professional investors seem to make a different set of errors than amateurs. In particular, i think they can sometimes take too little risk. For example, many traders try not to hold positions overnight, even though that is when most stock returns accrue. Similarly, a lot of professional option

This post reviews the backtest results of selling one-lot options strangles on the Russell 2000 Index (RUT), initiated at 52 days-to-expiration (DTE). The results in this post were derived from 2336 individual trades entered by the backtester. The results are grouped by the delta of the short

Research Review | 13 Aug 2015 | Portfolio Management Momentum and Markowitz: A Golden Combination Wouter J. Keller, Adam Butler, and Ilya Kipnis May 16, 2015 Mean-Variance Optimization (MVO) as introduced by Markowitz (1952) is often presented as an elegant but impractical theory. MVO is “an

A reader requested a test of the following hypothesis from the article “Gold’s Bluff – Is a 30 Percent Drop Next?”: “Ironically, gold is more than just a hedge against market turmoil. Gold is actually one of the most accurate indicators of the stock market’s long-term direction. The Dow

I. Trading Strategy Concept: Short-term momentum pattern with trend filter. Source: Hill, J. R. (1977). Stock & Commodity Market Trend Trading by Advanced Technical Analysis. Hendersonville, N.C.: Commodity Research Institute, Ltd. Research Goal: Performance verification of 3-Bar Momentum

Frequently Mentioned Python Backtesting Libraries It is essential to backtest quant trading strategies before trading them with real money. Here, we review frequently used Python backtesting libraries. We examine them in terms of flexibility (can be used for backtesting, paper-trading as well as

Steady Vol inversely weights holdings in an asset with respect to current volatility. Initially there was a little confusion about how Steady Vol was different from Low Vol strategies. Low Vol strategies weight individual constituent stocks by their volatility whereas steady vol weights periods

As I have written about in the past (here, here and here) the last five trading days of the month tend to be “the best of times” for t-bonds. T-bonds have showed a particularly strong historical tendency to perform well during the last five days of August. First the chart, then the numbers.