Do Index Futures and ETFs Affect Stock Return Correlations?

The best five links of the week ending Saturday, 06/27, as voted by our readers: Interview with Ernest Chan [Better System Trader] Think MPT Doesn't Work? Clearing Up Some Misconceptions [CSS Analytics] Creating an Open Source Hedge Fund Strategy [Quants Portal] Losing Streak Indicator [System

Andreas Clenow is a hedge fund manager who specialises in developing and trading quantitative strategies across all asset classes. He is currently a principal at ACIES Asset Management, which he joined after having successfully established his own hedge fund. Prior to his role as a hedge fund trader

This post concerns a paper I came across checking the nominations for best paper published in International Journal of Forecasting (IJF) for 2012-2013. The paper bears the annoyingly irresistible title: “The illusion of predictability: How regression statistics mislead experts”, and was written

little scepticism is healthy, however, many of you know the feeling of being plagued non-stop by this awkward feeling. My level of scepticism is always bobbing around unhealthy levels. So it's nice when a guy like Ilya questions numbers and kicks the tyres a little. An opportunity to treble

The S&P Dow Jones data source is now available to use in the Lazy Backtesting IDE. All manner of interesting investable strategies and asset classes, including volatility and retirement date targeting; Vix contango & backwardation and other quant-style strategies; which you can combine,

We’ve been discussing the weakening market breadth recently, especially as it pertains to New Highs vs. New Lows. Again, our contention is that the more stocks participating in a rally, the healthier the rally is. The most recent example of this weak breadth was Wednesday’s post on the fact that

Structured Products: Performance, Costs and Investments

A reader suggested a review of the Decision Moose asset allocation framework of William Dirlam. “Decision Moose is an automated framework for making intermediate-term investment decisions.” Decision Moose focuses on asset class momentum, as augmented by monetary policy, exchange rate and

Central banks the world over are buying high-quality bonds, thereby removing them from the market and forcing savers to find alternative strategies to meet their income needs. In this environment of financial repression and near-zero interest rates, dividend-yield (or equity income) investing has

History shows rather clearly that the stock market is prone to extreme events, aka crashes. The challenge is deciding when the risk for a repeat performance is unusually high. The literature offers endless possibilities, which is a reminder that the market can crumble for any number of reasons. The

Kyle (1985) introduces an information-based asset-pricing model where informed traders keep trading until the marginal benefit of holding one additional share of the asset is exactly offset by the marginal cost of this last trade’s price impact. This model has really nice intuition, but it also

I have spent many years toiling with creating different asset allocation methodologies including the application of traditional and non-traditional portfolio optimization. Given the recent flare of articles on this topic in the blogosphere, I felt it was worthwhile to share my two cents. Applying

My previous article detailed backtest results for the ETFReplay.com portfolio. Aggregate, risk-adjusted results since 2004 were impressive when compared to a 60/40 Vanguard mutual fund. However, results over the past 2-3 years lagged the benchmark. The test below was conducted using Portfolio123

This post will be short but very informative. You can learn a few good Unix/Linux tricks on the way. The goal is well defined in the title. So, what’s the quickest solution? We will make use of Python in the Unix-based environment. As you will see, for any text file, writing a single line of Unix

There's been a bunch of feature suggestions since the last update to the Lazy PCA site. All the code is on Github, if you have a little Javascript experience, I will gladly walk you through it. Please keep shooting feature ideas over too though. You know when you're done with an app when

he post ETF Sector Rotation generated good ideas on what to try differently. This post will research two ideas using Fidelity sector mutual funds. The previous post focused on two ideas on the Select Sector SPDR ETFs. Mutual Fund Universe These tests will use the Fidelity Sector Mutual Funds. The

A new working paper from Gennaili, Ma, and the one-the-only Andrei Shleifer. Expectations and Investment Using micro data from Duke University quarterly survey of Chief Financial Officers, we show that corporate investment plans as well as actual investment are well explained by CFOs’ expectations

A random number generator can beat your mutual fund. Given a choice between a random portfolio and a mutual fund, I’ll go with the randomizer every day of the week and twice on Sundays. You think I’m joking? I’m not joking. Trashing the mutual fund industry is almost like beating a dead horse.

A reader asked if there was any real difference between using a fixed stop at a given distance from our entry price or a trailing stop which we move so it stays a certain distance from the highest amount the investment has made. A trailing stop is a very comforting strategy. It seems to protect us

Authors: Grobis, Heinonen Title: Is Momentum in Currency Markets Driven by Global Economic Risk? Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2619146 Abstract: This article documents a robust link between the returns of the momentum anomaly implemented in currency markets and global

I have signed up for Attilio Meucci’s ARPM Bootcamp next month (July 13-18) in NYC http://www.symmys.com/arpm-bootcamp, and need to do quite a bit of prep as it’s going to be a deep-dive… The Advanced Risk and Portfolio Management Bootcamp provides in-depth understanding of buy-side modeling

Josh Brown had a fascinating post which postulated that the quants pose a significant systemic risk to market volatility: There’s an interesting idea going around that asset management – specifically the metastasizing quantitative strategies run via black box are where the next big scare is due

When arrested in Asia (many countries, not everywhere) never step into the station. Once you put a foot inside, there's an unstoppable force pulling you deeper into the bowels of the judicial system. Conviction rates in Japan, Korea and China are 99%+. For comparison, conviction rates are in

Over the last few years we've looked at various tools to help us identify exploitable patterns in asset prices. In particular we have considered basic econometrics, statistical machine learning and Bayesian statistics. While these are all great modern tools for data analysis, the vast majority

Investment News outlines an arbitration request by an investor seeking damages for being placed in two funds; one to F-Squared (an outright fraud) and another to Good Harbor's U.S. Tactical Core Fund (GHUIX). The adviser placed approximately $900,000 of the investor's savings, which his

Danny Zucco and Sandy loved the Summer Nights, but how have they played out for the market over the years? Below I examine two time periods. As you’ll see, the edge may be shifting. First, let’s look at numbers from the summers of 2000 – 2012 (from the night of June 21st – the night of

In case you are new to this game or just in case you never noticed, there are a lot of ways to play this game. This article details one. I can’t honestly say that this is a good strategy – the test period is relatively short, it uses leverage so it is risky, and drawdowns may be more than some

An astute reader of the post on Risk pointed out that one of the reasons risk management is hard is because it often involves estimating the chance of something that has never happened before. For example, what is the probability of the US defaulting on its debt or of Apple going bankrupt? Sometimes

Yesterday I published a study that showed the week after June opex has exhibited weakness in recent years. An astute newsletter subscriber suggested to me that this could be partially due to Russell rebalancing, which always happens at the end of June. His comments led me to wonder how the Russell

I am frequently asked about various strategy and portfolio performance metrics and backtests. A reader recently asked if there are any current backtests for the ETFReplay 6/3/3 Portfolio so I decided now is the appropriate time to provide updated results. The strategy background is available here

The idea is to build a quantitative hedge fund strategy based on momentum investing. With the obvious interest that I see on Quantocracy, I felt that this would be a topic that many of us are interested in. I didn’t want to run the risk of previous employers saying I used their IP, so I hired 4

The ideas I sketch out every afternoon are fanciful sweet little things, decorated to perfection. Then someone ventures a bite and sometimes finds that that's all they are. Fanciful. Readers are fantastic guinea pigs! Ilya got in touch about this post about diversification and rightly mentioned

The previous simulation was performed for only a specific process: geometric Brownian motion with a positive drift. It is possible, if a little harder, to do similar analyses for cases where the trade has a more complex, realistic set of outcomes. We can add fat-tails, crashes and skewness. We can

The middle of the year might be a time for funds to dress their windows and investors to review and revise portfolios. The 4th of July celebration might engender optimism among U.S. investors. Are there any reliable patterns to daily U.S. stock market returns around mid-year and the 4th of July? To

Deaccumulation is the new new thing in finance for an obvious reason: the US population is aging, which means that retirement becomes an increasingly pressing issue for financial planning. Perhaps the leading challenge for this critical task (other than accumulating a sufficient pot of money) is

The six FactorWave factors are size, value, quality, momentum, low beta and the market. These have all been studied in many markets and across many time-frames by both academic researchers and practitioners. The amount of evidence for their existence and profitability is overwhelming. However they

The effect of high-frequency trading on market quality has generated strong interest among academics, investors and regulators alike. To further explore the impact high-frequency trading can have on the markets, Jennifer Conrad, Sunil Wahal and Jin Xiang—authors of the study “High Frequency

The week after June opex is one that has struggled quite a bit in recent times. This can be seen in the table below, which shows full-week performance dating back to 1999 when the bearish inclination seemed to kick in. As you can see, it has been quite a streak of bearishness. Thirteen out of

'O' is notation in mathematics which describes getting ever closer to something. For example, in computer science it describes the efficiency that algorithms chomp inputs and produce results. In statistics it's related to how probabilities converge. E.g. the probability of very large

Ernie Chan is an expert in the application of statistical models and software for trading currencies, futures, and stocks. He has built and traded numerous quantitative models for investment banks and hedge funds. He is now the Managing Member of QTS Capital Management, commodity pool operator and

Martin Stisen got in touch after reading about the Mean Reversion + Momentum Strategy last week with an idea. Using the Hurst exponent to predict future returns. Quirky ideas are exciting. The Hurst exponent was originally found by observing how the Nile River waxed and waned over the years and now

In this post I surmised about the effect of stops and got about as far as I could by speculating from my armchair. So I simulated ten thousand investments. Before there is any stop we have a distribution with a mean of 10% and a standard deviation of 20%. This is similar to the performance of the

I received a request from pcavatore several posts ago. pcavatore was interested in "database update automation via R script." He wanted to know "how to run a daily task to update prices in the database." In this article we'll be using R and the RMySQL package to access and

Forecasting Directional Changes in Financial Markets

Developing & Backtesting Systematic Trading Strategies

The Cross-Section of Expected Returns in the Secondary Corporate Loan Market We examine the pricing of characteristics and betas in the cross-section of expected corporate loan returns. Expected loan returns decrease with default beta. Default beta contains information not captured by rating or

How many times have you bought a bottle of milk? And how many times have you bought a house? Which are you more comfortable with? It's no surprise that we make better repeated small decisions than the once in a lifetime big choices. When short horizon strategies make mistakes they dust

Sometimes I get asked how well momentum has done the past year or the past several years. If I am in a snarky mood that day, I'll respond, "What will that tell you?" The truth of the matter is that, in most cases, short-term performance is indistinguishable from noise and cannot tell

Barron's recently ran an article (written by Research Affiliates), which is titled "Get Smart About Picking Dividend-Rich Stocks." The article highlights that high-quality high-dividend-paying stocks outperform low-quality high-dividend-paying stocks. The quality of the firm is