The Europe Catch-Up Trade... $FEZ

Mean-Variance Optimization (MVO) as introduced by Markowitz (1952) is often presented as an elegant but impractical theory. MVO is "an unstable and error-maximizing" procedure (Michaud 1989), and "is nearly always beaten by simple 1/N portfolios" (DeMiguel, 2007). And to quote

In the introduction to their 2015 book entitled Invest with the Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy, authors Robert Johnson, Gerald Jensen and Luis Garcia-Feijoo state: “Our purpose in writing this book is to provide a general overview of the Fed’s role in

After a few days of living with our (pretty awesome) new voting feature at Quantocracy, we’ve opted to do away with down voting. Readers can now choose to either vote up or not vote at all on each link. We try to keep things friendly around these parts, and the down voting just began to feel a

I was recently asked to comment on an article that appears in the April 2015 issue of the American Association of Individual Investors Journal. The article is based on the paper “Mutual Fund’s R2 as Predictor of Performance,” which was published in the March 2013 issue of The Review of

This is part 2 of our series (or mini-series…TBD) on divergences. As we stated yesterday, divergences (in which one index achieves a new high whereas another does not) are generally over-cited as red flags. The problem is that the timing of their repercussions on the market - if any actually

See Jay’s recent post: One More Plunge for Crude Oil? If you are an ardent believer in the phrase “if something looks too good to be true it probably is”, then you’d better brace yourself. Because a “sure-fire, can’t miss, you can’t lose” thing is on the horizon in natural gas. Well

How Should I Tactically Allocate my Assets? A lot of investors ask this question as their wealth grows and the number of financial products grows exponentially. In order to generate a response, investors pay money to professional finance geeks who often present complex formulas as a solution to the

Divergences are one of the most oft-cited arguments in calling tops. They are also perhaps the least accurate. That’s because divergences (whereby one index reaches a new high while another fails to do so) both A) occur frequently and B) can persist for lengthy periods of time. For those reasons,

In the previous article on Bayesian statistics we examined Bayes' rule and considered how it allowed us to rationally update beliefs about uncertainty as new evidence came to light. We mentioned briefly that such techniques are becoming extremely important in the fields of data science and

Which Trend Is Your Friend? Managed-futures funds (sometimes called CTAs) trade predominantly on trends. There are several ways of identifying trends, either using heuristics or statistical measures often called "filters." Two important statistical measures of price trends are time series

Does the Memorial Day holiday signal any unusual return effects? By its definition, this holiday brings with it any effects from three-day weekends and sometimes the turn of the month. Prior to 1971, the U.S. celebrated Memorial Day on May 30. Effective in 1971, Memorial Day became the last Monday

The theory behind the glide path is easily distilled: as we grow older and approach retirement, we transition from an primary objective of growth to one of capital preservation. Our allocation profile, therefore, should follow this transition. Close to retirement, when capital preservation is

This is the first article in a series where we will look at the performance of the iron condor options strategy, where the loss exits will be greater than the profit exits. For background on the setup for the backtests, as well as the nomenclature used in the charts and tables below, please see the

A recent academic paper, Equal or Value Weighting? Implications for Asset-Pricing Tests, highlights two methods of weighting: Equal-weight and Value weight. As the paper states: With monthly rebalancing, an equal-weighted portfolio outperforms a value-weighted portfolio in terms of total mean

This may be one of the simplest strategies I've ever presented on this blog, but nevertheless, it works, for some definition of "works". Here's the strategy: take five global market ETFs (MDY, ILF, FEZ, EEM, and EPP), along with a treasury ETF (TLT), and every month, fully invest

Trading futures has one fairly substantial complication compared to many other assets. You can't just buy 'the CME Gold future'. There is no such thing. You need to select which delivery date future you are trading. Do you want to trade June 2015, July, August....? Once you've

If you're a long-term reader of my articles, or a subscriber to the newsletter, you will know that I am not a great supporter of a stop-loss system. This is mainly been because some testing we did came to the conclusion that a stop-loss strategy leads to lower returns even though it did reduce

During my series on dynamic exits of iron condors, I received several requests for an expansion of these backtests. Specifically, people asked if I could run the tests with larger loss thresholds. I thought this was a good idea. I've decided to postpone the series on the Strangle options

There was a period not so long ago on a planet not so far when I lost all concept of value. I had lived in many countries in as many months and lost track of what anything was worth. Euros, USD, SGD, IDR and AUD became indistinguishable units of exchange, a means to an end, I handed over a fist of

Most narrow SPX run to new highs since 2007 top $SPY

Despite the options expiration, SPY volume came in at the lowest level of the week. When combined with the fact that the VIX also closed at a recent low it brought about a bearish study from the Quantifinder. Results below are all updated. The low VIX typically suggests complacency. It also

Rob Hanna has been a full-time market professional since 2001. He first began publishing his market views and research in 2003. From 2003 to 2007 his column “Rob Hanna’s Putting It All Together” could be found twice a week on TradingMarkets.com. In 2008 Rob began Quantifiable Edges and in 2012

In Episode 7 of the podcast Rob Hanna provides an idea for shorting extremes in a bear market: I got one in bear markets that shows all right, what happens if… you sold short every 20 day high below the 200 day moving average or something like that and exited when it got back below the 20 day

Post-discovery Performance: Will Anomalies Fade Away After Discovery? (Qu, Lu, Sun and Yan) The Search for Crisis Alpha: Weathering the Storm Using Relative Momentum (Newfound Research) Are Your Backtest Results fooling you? Try Monte Carlo Analysis (Better System trader) Buffett’s Alpha

Beauty.. really? well, beauty is in the eye of the beholder. One of the most striking features of using Maximum Likelihood (ML) method is that by merely applying the method, conveniently provides you with the asymptotic distribution of the estimators. It can’t get more general than that. The

Being a loser is an art. I am not interested in being a good loser, but in knowing when to quit. The art of quitting can be acquired after a little numerical analysis. (Not necessarily due to all the confusing linear algebra!) In the world of numerical solutions there is no correct answer. Knowing

The paper gives evidence of a novel pricing factor for the cross-section of carry trade returns based on trade relations between countries. In particular, we apply network theory on countries' bilateral trade to construct a measure for countries' exposure to a global trade risk. A higher

Another commodity hits bull market threshold $UNG

We're very proud to announce our public release of live trading with Interactive Brokers! Now you can seamlessly design and trade your algorithm within QuantConnect. Automated live trading is one of the most challenging engineering problems in financial technology. It involves controlling large

Connect with Jacques on LinkedIn During my senior year, at a university that promised to teach me things, I found myself staring at financial statements wondering to myself "what is it the Quants see that I don't?" and so began my journey into quantitative finance. Throughout my

Another week another Lazy Backtest IDE update. Now you can incorporate yield data into your strategies, oh, and also use it in your Sharpe ratio calculations. Also - no one likes little black boxes, right? No one! So, I included a link to download a CSV file of results. Meaning you can understand

As a tactical asset management firm, we seek to offer a full range of downside risk managed investment strategies, covering all parts of an investor's portfolio. We believe that controlling drawdown and smoothing volatility is a critical objective, as periods of capital loss often coincide with

With the major indexes again pushing up near new highs, it is a good reminder that despite all of the ancillary concerns about the market (many of them voiced by us), the trump card ultimately is price. And while there have been some potential cracks recently on that front, by and large, the trend

Building a fully automated, algorithmic trading strategy can seem like a daunting task but can actually be broken down into a series of simple steps. In this post, we'll go through the three steps to building an algorithmic strategy: Idea, Test, and Trade, and break down what you need to know

Off the Rails. Transports diverge from SPX $IYT $SPY

It’s been (alas, correctly) brought to my attention that my description of the “Simple Pattern” I wrote about was, um, not so simple. To wit, the author writes: “Not every Day 1 signal generates an entry signal. If the 2nd trading day after the “close below previous low” (Day 3) does not

In the May edition of "Technically Speaking" released by the Market Technicians association there was an interesting reprint of a blog post written by Tucker Balch entitled "9 Mistakes Quants Make the Cause Backtests to Lie". The post is clear and concise and provides an

I posted the other day about fundamental indexation being the O’Doul’s of value investing, because it is just the first step away from a market cap weighted index and towards a more differentiated value portfolio. I received lots of emails about the post, so figured I would spend more than 20

Abstract: We distinguish between “good” and “bad” carry trades constructed from G-10 currencies. The good trades exhibit higher Sharpe ratios and slightly negative or even positive skewness, in contrast to the bad trades that have both substantially lower Sharpe ratios and skewness.

Over the last four months of blog posts we've looked at 7 different approaches for exiting iron condors. These exits included: Exit at 8 DTE ML40% - exit when the loss is equivalent to 40% of the margin for the position OR 8 DTE BSP - exit when the market is below the strike of the short put

This post will introduce several ETFs from Alpha Architect and Cambria Funds (run by Meb Faber) that I think readers should be aware of (if not so already) in order to capitalize on systematic investing without needing to lose a good portion of the return due to taxes and transaction costs. So, as

As I admitted in my last post, I am a something of a trading “systemaholic”. And yes, on many occasions I have started out with a simple idea and by the time I was done I had 600 lines of code and only a vague recollection of what that original simple idea was. So take it from me: While

I never plan long term. As I grow older my horizon has become shorter and shorter. This vexes my girlfriend. Naturally, I retort, my days on the planet reduce with every day lived. Our holidays are spent jumping from one town to another in Indonesia or China, nothing's booked more than a day or

Since the development of the capital asset pricing model (CAPM) about 50 years ago, academic researchers have documented several hundred “anomalies” that generate a significant positive alpha. There are now so many that professor John Cochrane referred to them as the “factor zoo.” There are

In a previous article I outlined the best degree courses to take in order to help you get a job as a quant. I also mentioned that to discuss the best UK universities was an article in itself. This is that article! Coincidentally, the QS World University Rankings for 2014/15 have just been released

We don’t talk too often (because we don’t use them) about traditional technical analysis indicators. We have nothing against them; it’s just that we have our own methodologies and processes that work for us. One indicator we do like to keep an eye on is the ADX, or Average Directional Index.

Material improvement $XLB

A while back I got over my addiction to Elliott Wave analysis. I finally realized I needed help and joined a five wave, er, step program. But some obsessions still linger. As an admitted "systemaholic" ("Hi, my name is Jay") I am always on the lookout for new ways to make money

Many recent articles discuss rising rates with a focus on how to weather them along with some predictions of when they will occur and how much they will rise. Duration is a common theme among the articles since it quantifies how much a particular bond is likely to lose when rates rise. We've