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

Is a market trending or not? Even this simple question, which is at the heart of most of our thinking about markets, is not easy to answer. Definitions of trend are often subjective, depend on both timeframe (e.g., daily or intraday) and reference period (i.e., how far are we looking back?), and are

We study whether commonly analyzed equity return predictors also predict corporate bond returns. Bond markets do price risk, but also are susceptible to delayed information transmission relative to equities. Specifically, equity market capitalization and firm profitability negatively predict bond

Where Do Stocks Go From Here? After six years of virtually uninterrupted gains, people are wondering where we go from here. Stocks are up more than 200% over the last six years which is the best six-year run since the tech bubble. Looking at the chart, we see that we are well above the 85%

In today's entry of the Forex Trading Diary I want to discuss the longer term plan for the forex trading system. In addition I want to outline how I've used Python's Decimal data-type to make calculations more accurate. To date, we've been experimenting with the OANDA Rest API in

Recently I have been working on the problem of how to construct large portfolios of cointegrated securities. My focus has been on ETFs rather that stocks, although in principle the methodology applies equally well to either, of course. My preference for ETFs is due primarily to the fact that it is

Saint Patrick’s Day is March’s sole recurring cultural event. Gains the day before Saint Patrick’s Day have proved to be greater than the day itself and the day after. Perhaps it’s the anticipation of the patron saint’s holiday that boosts the market and the distraction from the parade

Existing studies show that firm asset and investment growth predict cross-sectional stock returns. Firms that shrink their assets or investments subsequently earn higher returns than firms that expand their assets or investments. I show that the superior returns of the low asset and investment

In Part 1, I discussed an issue that can occur when using dividend adjusted price data in Momentum Rotation Strategies that select funds based on a relative ranking algorithm. I outlined three different data approaches that can be used, and presented a simple rotation strategy and portfolio to

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Bad junk food tastes great; until the after effects kick in hours later. Similarily, flashy financial analysis will have you happily plunging money into a shiny new scheme, only noticing the stomach churning results afterwards. Let's take a look at some whizzy analysis that financial experts

In the previous post on using R for portfolio analysis and design, we discovered that global diversification across asset classes has been modestly beneficial relative to a basic 60%/40% US stock/bond allocation. The global aspect didn’t add a lot of value because US equities during the sample

Related research paper has been included into existing free strategy review. #33 - Post-Earnings Announcement Effect Authors: Kwon, Kim Title: Investment Horizon of Shareholders and Post-Earnings-Announcement Drift Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2545189 Abstract: We

There is a seasonal influence that could have a bullish impact on the market this week. Op-ex week in general is pretty bullish. March, April, October, and December it has been especially so. S&P 500 options began trading in mid-1983. The table below is one I have showed on the blog in years

Manager Selection (Scott Stewart) Measuring the Size Effect with Capitalization-based ETFs (CXO Advisory) Asymmetric Reporting (Armstrong, Taylor and Verrecchia) The Piotroski F Score in the Australian Market: Performance & Fundamental Drivers (Charles Hyde) How Often Should You Take Tactical

I am going to take a short break from reviewing backtest results for different variations of Iron Condors, and revisit Momentum Rotation strategies. In a past post (Historical Data and Momentum Rotation Strategies), I discussed how data choices impact the repeatability of ranking output typically

Before I detail any sort of “strategy” (and please note that the use of the word “strategy” and the lack of the words “mechanical trading system guaranteed to generate obscene profits ad infinitum into the future”) let me address a few questions that have come up since I wrote this

I have 4 Bitcoin L3 exchange feeds running smoothly out of a data center in California (which is slightly closer to Asian exchanges and Coinbase than the east coast). It took a bit of error handling and exponential back-off, to handle the unreliability of connectivity with these exchanges, where

Another hotly anticipated FOMC meeting kicks off next week, so I thought it would be timely to highlight a less well-known working paper, “Stock Returns over the FOMC Cycle”, by Cieslak, Morse and Vissing-Jorgensen (current draft June 2014). Its main result is: Over the last 20 years, the

More and more frequently I come across people who express an interest in R, and I thought I would share some advice to help people decide if R is something they should use, as well as some high level advice on getting started. Most of these people are developers with at least few years experience

Next week is options expiration week. March is the first time of the year when stock options, index options, index futures, and single-stock/ETF futures all expire at the same time. This event is often referred to as Quadruple Witching or as we prefer to call it in the Stock Trader’s Almanac (page

This study sought to disentangle the effects of size and whether there are size and momentum effects on Jordan firm returns. Initial findings showed that size effect has important role in explaining returns. For momentum effect, while in general there is no momentum effect in Jordan firm market, the

Years flat by the Ides of March $SPY