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

This is a short update to inform current and prospective readers of Successful Algorithmic Trading that the Python code in the book has been updated to be fully compatible with both Python 2.7.x and Python 3.4.x. In addition I've created a requirements.txt file that allows you to easily

#20 - Volatility Risk Premium Effect Authors: Donninger Title: Hedging Adaptive Put Writing with VIX Futures : The Affenpinscher Strategy Link: http://www.godotfinance.com/pdf/AffenPinscherStrategy_Rev1.pdf Abstract: In a previous working paper I analyzed the Austrian and Doberman Pinscher strategy.

Since 1929, the Dow Jones Industrial Average has rarely ever been so close to a 52-week high while the Dow Transports AND Dow Utilities were so close to a 6-month low. A few weeks ago, we ran a series on divergences in an attempt to provide some statistical evidence to the debate on this ambiguous

This post looks at a standard (STD) one-lot iron condor on the Russell 2000 Index (RUT), initiated at 80 days-to-expiration (DTE). The results in this post were derived from approximately 3200 individual trades entered by the backtester. For background on the setup for the backtests, as well as the

As to be expected, there are more than a few reasons behind quantitative hedge funds sustained losses. According to The Economist (2012), two main reasons for poor performances can be in the form of unexpected announcements from politicians and central banks which then cause unexpected market

Conventional wisdom can be defined as ideas so ingrained in our belief system that they are accepted without challenge. Unfortunately, much of the conventional wisdom about investing is incorrect. For example, the conventional wisdom that investors seeking high returns should invest in countries

Our eyes initially evolved underwater while our ancestors were fish and only later adapted to seeing things above. We are now terrible at seeing things when dunked under, however that's not the point. Water blocks out most of the red part of the electromagnetic spectrum, which is why we

In a previous post on this subject, we related the loadings of the principal components (PC’s) from the singular value decomposition (SVD) to regression coefficients of the PC’s onto the X matrix. This is normal given the fact that the factors are supposed to condense the information in X, and

When important people on Wall Street and Capitol Hill are actively criticizing an aspect of corporate America, we’d better take notice. Share buybacks—the open market repurchase of a company’s shares by the company itself—have been under a lot of fire. The amount spent on buybacks is

In this post, I will be documenting a few of my strategies. The Two Divide in Universe Selection From my personal experience of hacking up strategies and browsing the forums for interesting topics/ideas, I found that there are often two divides in setting up the universe of stocks to trade. The

My readers know I am a trendfollower at heart. I originally sent this to The Idea Farm but received so many questions I figured I would post here too. This study was completed by Ned Davis Research, and could not be more simple. (Similar in theory to our old QTAA paper from 2007, as well as systems

1. Motivation New information-based asset-pricing models are often extensions of either Kyle (1985) or Grossman-Stiglitz (1980). At first glance, these two canonical models look quite similar. Both price an asset with an unknown payout, like a stock or bond, and both analyze the strategic behavior

Value has heavily underperformed growth over the last decade. But since 2000 and historically it has handily beaten growth. As well as investing in shininess (like Facebook and Google) what do you get for your money when investing in growth stocks? The main difference between growth and value is

The always interesting quant aggregator Quantocracy linked to the following post by John Orford (follow John on Twitter at @mmport80) outlining a 'Steady Volatility Strategy' that targets a constant volatility target based on the most recent VIX index as follows: Stock weight = Target

This week we wanted to spend some time digging into performance of our Risk Managed U.S. Sectors (“RMUS”) and our Multi-Asset Income (“MAI”) portfolios. At Newfound, we generally break portfolio construction into two pieces: (1) the signals that drive our tactical decisions, and (2) the

This is the third post in a series giving pointers on the nuts and bolts of building systematic trading systems. A common myth is that the most important part of a systematic trading system is the 'algo'. The procedure, or set of rules that essentially says 'given this data, what

This post looks at a standard (STD) one-lot iron condor on the Russell 2000 Index (RUT), initiated at 66 days-to-expiration (DTE). The results in this post were derived from approximately 3200 individual trades entered by the backtester. For background on the setup for the backtests, as well as the

Interesting about the action on Friday was that SPY posted an unfilled gap down, and this occurred immediately following an unfilled gap up the day before. The study below was appeared in the Quantifinder. It examines 2-day moves like SPY has just encountered. Based on the numbers there appeared to

#198 - Exploiting Term Structure of VIX Futures Authors: Donninger Title: Selling Volatility Insurance: The Sidre- and Most-Strategy Link: http://www.godotfinance.com/pdf/VIXFuturesTrading_Rev1.pdf Abstract: This working-paper examines and improves a VIX-Futures calendar-spread strategy proposed in

Ralph Vince is a trading systems expert who has been programming trading systems for fund managers, sovereign wealth funds and staking systems for "professional gamblers," since the early 1980's, working as a personal programmer to legendary traders like Larry Williams. He is a

The probability of improbable events. The simplicity amongst complexity. The purity in its best form. The ultimate cure for those who trade, for those who invest. Does it exist? Can we compute it? Is it really something impossible? In this post we challenge ourselves to the frontiers of accessible

Dynamic Volatility Weighting in the Presence of Transaction Costs

Crowded Spaces and Copycat Risk Management

Stop losses are a form of trend following in which you switch from risky assets, such as stocks, to a risk-free or fixed income asset after there are pre-determined cumulative losses. The random walk hypothesis (RWH) was widely accepted in the 1960s and 1970s. It was synonymous with market

Always outnumbered but never outgunned. That's how the saying goes. But this time you are outgunned and staring death squarely in the face. In the moments before your final reckoning, you think about your children, husband - and the impending invasion. This is it. And that is precisely what

Price to sales is a very simple valuation ratio. It has the tendency to bias you towards lower margin and higher debt companies, all else equal, but it has still been a very effect measure of cheapness and a fine standalone factor for stock selection. Having explored the history of the ratio,

There's a phrase or attitude in and around Java called pasrah. Maybe it's dying out only surviving in some out of the way places which haven't been totally submerged in bit and bytes. Pasrah means 'resignation'. Train doesn't come on time? Pasrah. Stuck in a humungous

It is well known that an efficient portfolio should be comprised by uncorrelated assets. The objective is to cover possible widespread falls of all portfolio’s assets. But, what actually is the negative effect of investing in correlated assets? Does the correlation benefit at anytime? How often

Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum. Antonacci’s book, Dual Momentum Investing: An Innovative Strategy for Higher

The academic study of price momentum has intensified considerably since 1993, the year Narasimhan Jegadeesh and Sheridan Titman's paper, "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," appeared in The Journal of Finance. The authors found that

Lots of posts in the past week about breaking down time series returns into momentum and mean reversion. Vix Equity Momentum Mean Reversion + Momentum strategy Now you can PCA too! I have added an interface to the code I have been using and called it Lazy PCA. Try it out and let me know what you

Following on from my PCA posts (1, 2, 3) I decided to write a strategy based on them for the Lazy Backtesting IDE. Two combined together in fact. If momentum has been detected, go long when the last day's return is positive and vice versa. Do the opposite when mean reversion is detected. Plus,

This post looks at a standard (STD) one-lot iron condor on the Russell 2000 Index (RUT), initiated at 59 days-to-expiration (DTE). The results in this post were derived from approximately 3200 individual trades entered by the backtester. For background on the setup for the backtests, as well as the

Many investors are getting excited about the so-called “profitability factor,” originally posed by Novy-Marx (here is an alternative story) . Larry Swedroe has a high-level piece advocating the concept here. The basic idea is simple: Other things being equal, firms with high gross profits

Check out the first and second posts in this series to get up to speed. This is a picture of AAPL's monthly returns over the last 3 years. It shows ever so slightly more momentum than mean reversion as the ellipse is pointing up right. In contrast to the previous equity and Vix pictures the

#21 - Momentum Effect in Commodities #22 - Term Structure Effect in Commodities Authors: Benham, Walsh, Obregon Title: Evaluating Commodity Exposure Opportunities Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2602885 Abstract: Commodities as an asset class have been in growing demand over

We know that markets overdo it at extremes. At the market level, we call these bubbles or manias, panics or crashes. At the stock level, we call them glamour and value. Let’s collect some lessons from the best performing stocks from the two categories where investors have the most extreme (good or

What are the most pressing systematic weaknesses in financial research, and how should the investment community address them? In the May 2015 version of his article entitled “The Future of Empirical Finance”, Marcos Lopez de Prado identifies three major problems in empirical finance and proposes

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 believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting

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. —- Warren Buffett mentioned asset allocation instructions for his trust in his 2013 shareholder letter: “What I advise here is

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. —- “Because for any given level of return, if you diversify, you can generate that return with a lower risk; or for any given

Last time I had a look at the Vix's returns plotted against each other with a quarter lag. Now I am doing the same with the S&P 500. Whereas the Vix's returns were mostly found in the bottom left corner and reflected positive skew, I promised equities would be in the top right and