"Buy the rumor, sell the fact" is an over-used phrase traders say to describe the way the equity markets get excited by future events then lose steam when the event actually happens. Because the VIX is strongly negatively correlated with the equity markets, this could be changed to

In my posts, I often mention a volatility rebalancing strategy. Originally, this strategy supposed to rebalance a portfolio daily to local volatility measured by standard deviation. I strongly suspect, that a common retail investor will stop trying to understand this strategy right after words

Markowitz Model is a famous method allocated in the Portfolio Investment Theory. This model provides efficient portfolios, i.e. portfolios with the highest rentability and lowest risk possible through mathematical programming. The set of portfolios composes the efficient frontier. The strategy is

One of the things that “everyone knows to be true” is that the trades of company insiders convey valuable information. But is this really true? And are some types of trades more informative than others? If you can get hold of the relevant data, this is the sort of question that is very amenable

In a round about way from New York to Singapore, I landed in Oz in 2012. It was like walking into a pre '08 New York or Ireland with funnier accents. They call '08 the 'GFC' or the 'Global Financial Crisis' and talk about it in a sort of detached way - because that

Seminal work by Jegadeesh and Titman (1993) found that past winners outperform past losers over a horizon of 3-12 months. Investors thus take a long position on winner stocks and a short position on loser stocks in order to realise anomalous profits. This strategy is widely adopted and appears to be

I use sports betting markets as a laboratory to test behavioral theories of cross-sectional asset pricing anomalies. Two unique features of these markets provide a distinguishing test of behavioral theories: 1) the bets are completely idiosyncratic and therefore not confounded by rational theories;

Liquidity can be described as the ability to trade a large number of investments quickly, at low costs and when you want to. Because it is a priced risk, liquidity and its associated price effects are an important aspect of financial markets. In illiquid markets, such as the private equity market,

Risk Premia in Option Markets

Summary Trend-following is one of the oldest investment methods Labeled as technical analysis, trend-following went largely un-researched by academics Research of cross-sectional momentum exploded after Narasimhan Jegadeesh and Sheridan Titman published their seminal 1992 study, but time-series

Low volatility stocks are better than those with high betas, right? Wrong! Completely and utterly wrong. High betas are costlier because as not-very-many point out - convexity or gamma is important! When the S&P is doing well the high beta index has a beta of 1.84 and when it's doing badly,

This study was inspired by Ben Carlson’s blog post a few months ago. Ben highlights Robert Hagstrom’s book “The Warren Buffett Portfolio.” The high level question is the following: How can one beat the market? Answer: To beat the market, you have to be different than the market. One simple

I recently had a disagreement with a trader friend. He said CNBC has become a waste of time to have on. I said it has always been a waste of time to have on. His point was that there are times when has been able to give him ideas about what stocks to follow. He thought it was self-evident that

This post looks at selling one-lot options strangles on the S&P 500 Index (SPX), initiated at 73 days-to-expiration (DTE). The results in this post were derived from more than 2300 individual trades entered by the backtester. Other 73 DTE variations will be posted on my Twitter feed,

The following post shows you how to check for any stock splits and ex-dividends happening. It'll spit out a list of symbols. These can be used as alerts or piped into another script for updating your database as needed. I want to thank pcavatore for suggesting this topic! Comments and

This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook. If you promise to write a review, go here and I’ll send you a free copy. —- I would classify both my mother and grandmother as traditional Southern cooks. Their style was very much of the “finger”

The Mojito uses a step function to switch up allocations between the VXX and VXZ ETFs over time. A bunch of rules which says... If the spot VIX to VXV (3 month VIX future) ratio ('IVTS') is lower than 0.91 then short the VXX (short term VIX future ETF) and weight by -0.7, while long the

In a recent post I discussed how the short borrow rate could be used as a predictor of future stock returns. This prompted a reader to ask if the analysis had taken short squeezes into account. This is a good point. Because of the mechanics of short selling it is sometimes not possible to hold short

Well here I go again breaking one of my own cardinal rules again – i.e., being critical of someone else’s writing. Must be getting cranky in my old age. Anyway, I recently read an article calling margin debt “an indicator that predicts nothing.” No the writer is actually technically correct

Active investors with limited attention and capital constraints use fundamental metrics to screen and sort potential investments. Price-earnings (P/E) ratios are extremely popular, and are typically calculated using four trailing quarters of net income. Changes in the rankings of published P/E

People generally compartmentalize their knowledge. They try to think of things in terms of categories and frameworks rather than remember a bunch of disconnected facts. For example, chemists think of the world in terms of interactions between elements, astrologists (a.k.a stupid people) think of the

This post looks at selling one-lot options strangles on the S&P 500 Index (SPX), initiated at 66 days-to-expiration (DTE). The results in this post were derived from more than 2300 individual trades entered by the backtester. For background on the setup for the backtests, as well as the

This week’s Charts Of The Day and blog posts have had a heavy bearish bent to them. That isn’t by design. We just go where the data leads us and much of the data, in our view, is skewing to the bearish side for equities. Included in the concerning assortment of data are many examples of

Carry and Trend Following Returns in Foreign Exchange Market

Today we have a guest post from David Weilmuenster who I worked with while at Connors Research. A widely applied technique for scoring assets in rotational systems is to rank those assets by their price momentum, or return, over a given historical window and to rotate into the assets with higher

Yesterday we wrote a post showing a potential way to time the market using valuation-based signals. In the past we have also examined how to use momentum-based signals (moving average rules and time-series momentum) to time the market. A natural question is what happens when we combine the

In the last article of the Time Series Analysis series we discussed the importance of serial correlation and why it is extremely useful in the context of quantitative trading. In this article we will make full use of serial correlation by discussing our first time series models, including some

The European Central Bank just released a research report that might be of some interest to readers of this blog. It turns out that Social Data can be useful in predicting the stock market (go figure!): Quantifying the effects of online bullishness on international financial markets [ECB] …In our

Mandelbrot has significantly contributed in many ways to the area of finance. He was one of the first who criticized the oversimplifications centered around the early stochastic process models of Bachelier utilizing normal distribution. In his view, markets were fractal and much wilder than

We’ve had a few posts showing that asset allocation systems relying on market valuation indicators (e.g., Shiller CAPE ratios) as a timing signal may end up in disappointment… Can market Valuations Be Effective Market-Timing Signals? Dissecting Goldman’s 99 Percentile Market-Timing Signal

Night Trading: Lower Risk but Higher Returns?

People often get systematic and automated trading mixed up. The latter is a subset of the first. You can't have a system which is fully automated if it relies on discretionary input, no matter how small. But you can have a system which needs a human to make it run, even though there is no

In order to sell a stock short you first need to borrow it from someone else. The way that this typically happens is that your broker takes it from another clients account and loans it to you. You can then sell it to someone else. Although this means you end up with cash in your account, individuals

After winning two consecutive national championships, the Green Bay Packers lost a game due to sloppy play. Coach Lombardi called a meeting the very next day to get his team back to fundamentals. When all the players were assembled, Lombardi held a football high up in the air and declared,

Earlier this week I was starting an investigation into stock splits and I found out about the price factor: the fact that low priced stocks outperform high priced stocks. This is a very useful finding if it is robust so it needs more investigation. At the end of that blog post I wrote: "This

This post looks at selling one-lot options strangles on the S&P 500 Index (SPX), initiated at 59 days-to-expiration (DTE). The results in this post were derived from more than 2300 individual trades entered by the backtester. For background on the setup for the backtests, as well as the

In the field of predictive analytics, a confusion matrix is a table that allows the visualization of the performance of an algorithm whose objective is to predict the classes of a variable. The name “confusion” comes from the fact that it makes it easy to see if the system is mislabelling one

I have recently reviewed couple of books. The first of which is actually a give-away if you promise to review it. Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies Simply register here and get a kindle version after a few days. The review: Relatively short book which

Robert Shiller’s cyclically adjusted price earnings (CAPE) ratio takes a 10-year inflation-adjusted average of the S&P500’s earnings to arrive at a price/earnings metric smoothed for the business cycle. It’s useful because earnings tend to be volatile and mean reverting. For example, the

Contrary to popular belief, bonds and stocks are non linear derivatives, just as options are. They are just less obviously so. Stocks can be thought of call options on the value of a company with a strike of zero. Bonds can be seen as short put options on the value of the company with a strike of

Who Supplies Liquidity, How and When?

Around the Ising Model

Large U.S. companies spent nearly half a trillion dollars on net buybacks (cash spent on buybacks less cash raised through issuance) during the 12 months ending 6/30/2015. That’s almost as much as the buyback peak in 2007, which didn’t turn out too well. Scary! But hold on. Something that gets

Stock splits lower the stock price. But what does that mean? Most straightforwardly, do lower price stocks perform better than higher priced stocks? Soosung Hwang and Chensheng Lu examined this and published their results in the paper, "Is Share Price Relevant?". They used

As the proud father of 3 kids (to include 2 daughters), this set of papers, while a bit off the wall, made me smile a bit. In short, there seems to be a negative relationship between women and lawsuits–the more women surround an organization, the less legal trouble the organization faces. It would

Do active investment managers as a group successfully time the stock market? The National Association of Active Investment Managers (NAAIM) is an association of registered investment advisors. “NAAIM member firms who are active money managers are asked each week to provide a number which

A Diverse Momentum System Using Vanguard Allocation Funds generated a plethora of feedback. Can we improve or simplify the system? And does it hold up well if variables are changed? The systems tested in the original article rarely held the Moderate Growth (VSMGX), which allocate 60% stocks/40%

I wrote about mean reversion in my book The Ivy Portfolio back in 2008. Below is a chart from the book with a couple studies of what has happened after you buy assets down multiple years in a row. (You can also search the archives for words like “reversion” to find lots of old posts like this on

This post looks at selling one-lot options strangles on the S&P 500 Index (SPX), initiated at 52 days-to-expiration (DTE). The results in this post were derived from more than 2300 individual trades entered by the backtester. For background on the setup for the backtests, as well as the

In theory, small-cap and value stocks offer solid premiums over their large-cap and growth counterparts. In the short term, however, turning theory into real-world profits can get messy. As an example, let's review how the small-cap and value premia stack up at the moment via representative