Quant Mashup Chapter 13 – Summary [Meb Faber]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”(...) Generalising the Mojito Strategy [John Orford]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(...) The Mechanics and Dynamics of a Short Squeeze [Factor Wave]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(...) Margin Debt – Bad or Beautiful? [Jay On The Markets]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(...) P/E “Attention” Strategies Earn Monthly Excess Return of 1% [Alpha Architect]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(...) Carry: An Investing Framework [Factor Wave]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(...) SPX Strangle - High Loss Threshold - 66 DTE [DTR Trading]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(...) Add Junk Bonds To The Growing Pile Of Concerns [Dana Lyons]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(...) [Academic Paper] Carry and Trend Following Returns in Foreign Exchange Market [@Quantivity]Carry and Trend Following Returns in Foreign Exchange Market Multiple Time Frames for Scoring ETF Rotational Strategies [Alvarez Quant Trading]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(...) Market timing with Value and Momentum [Alpha Architect]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(...) White Noise and Random Walks in Time Series Analysis [Quant Start]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(...) New Academic Research: ECB predicts stock market using social data [MKTSTK]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(...) Fractal mathematics used to explain #14 - Momentum Effect in stocks [Quantpedia]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(...) Eureka! A Valuation-Based Asset Allocation Strategy that Might Work [Alpha Architect]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(...) [Academic Paper] Night Trading: Lower Risk but Higher Returns? [@Quantivity]Night Trading: Lower Risk but Higher Returns? Systems building - execution [Investment Idiocy]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(...) Short Rates as a Predictor of Stock Returns [Factor Wave]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(...) Back to Fundamentals [Dual Momentum]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,(...) More on the Price Factor [Factor Wave]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(...) SPX Strangle - High Loss Threshold - 59 DTE [DTR Trading]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(...) Confusion matrix & MCC statistic [Quant Dare]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(...) Mastering R for Quantitative Finance [Eran Raviv]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(...) What happens to value in sideways markets: Shiller PE and expected returns using Hussman’s method [Greenbackd]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(...) Bond Premia [John Orford]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(...) [Academic Paper] Who Supplies Liquidity, How and When? [@Quantivity]Who Supplies Liquidity, How and When? [Academic Paper] Around the Ising Model [@Quantivity]Around the Ising Model High Conviction Buybacks [Investor's Field Guide]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(...) The Price Factor [Factor Wave]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(...) Daily Academic Alpha: Why Women Should make MORE than Men... [Alpha Architect]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(...) Active Investment Managers and Market Timing [CXO Advisory]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(...) Diverse Momentum – Can We Do Better? [Scott's Investments]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%(...) Three Years Down in a Row System [Meb Faber]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(...) SPX Strangle - High Loss Threshold - 52 DTE [DTR Trading]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(...) Reviewing Small-Cap & Value Premiums Through An ETF Lens [Capital Spectator]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(...) Interesting research paper sheds light on multiple anomalies [Quantpedia]#14 - Momentum Effect in Stocks #25 - Small Capitalization Stocks Premium Anomaly #26 - Value (Book-to-Market) Anomaly #38 - Accrual Anomaly #52 - Asset Growth Effect Authors: Fan, Opsal, Yu Title: Equity Anomalies and Idiosyncratic Risk Around the World Link:(...) Research Links: Boltzmann Machines [MKTSTK]Neural networks have long fascinated us from a distance, but quite frankly, we’ve always had lower hanging fruit to pick: there’s always been a simpler model that didn’t require us learning a whole new thing. Let’s face it, as traders we are always looking for the highest level of(...) Comparing Timing Strategies [John Orford]Way back when I got interested in testing market efficiency, which led me to build the Lazy PCA site; and then I noticed that the principal components / drivers / ideas of almost every return time series are momentum and mean reversion. I never expected that returns could be sliced up so neatly.(...) [Academic Paper] Hawkes Processes [@Quantivity]Hawkes Processes New Paper from Markowitz: Introducing the Gerber Statistic [Flirting with Models]Harry Markowitz, father of modern portfolio theory, has a new paper out with Sander Gerber and Punit Pujara titled Enhancing multi-asset portfolio construction under Modern Portfolio Theory with a robust co-movement measure. You can download it here. The big take away is the introduction of a new(...) Daily Academic Alpha: Fresh Evidence on the Fama French 5-Factor Model [Alpha Architect]The past few weeks we’ve highlighted a set of research papers that go back and forth on the validity of the Fama and French “5-factor model.” A sampling of the research: The Fama French 5-Factor Paper The Kewei, Xue, and Zhang (KXZ) 4-Factor Paper (critically assesses the FF 5-factor model)(...) A New Factor: Illiquidity [Factor Wave]Value, size and low volatility "anomalies" have been studied for decades. Momentum has only been recently recognized by academics but a lot of practitioners have been firm believers in it for many years. Quality is the most recent of the well accepted factors but the components that go(...) A Diverse Momentum System Using Vanguard Allocation Funds [Scott's Investments]One of the criticisms of momentum systems is they are prone to crashes when momentum reverts. The system highlighted in this article can be implemented using any number of “life style” or target-risk funds or ETFs. The system chooses from a small number of funds that reflect a range of asset(...) [Academic Paper] Rich Component Analysis [@Quantivity]Rich Component Analysis How much data should I use to build a trading strategy? [MKTSTK]On average, High Frequency Trading is a young profession. At meetups, high frequency traders are likely to refer to the years prior to 2008 as “ancient history”. As a group, their attention spans might seem short and HFT strategies resemble their creators to a startling degree. However, in(...) Variance Factors on VIX Futures II – Principal Component Analysis [Quanttech]In my last post I demonstrated how you can generate synthetic futures prices. In this post I am going to build on this and show how you can apply principal component analysis (PCA) to determine how much of the variability in returns each of the different futures are responsible for. Creating our(...) Daily Academic Alpha: Analyzing the Effects of Long-Term vs. Short-Term Investors [Alpha Architect]Through the traditional lens of the efficient market hypothesis, market prices stick close to their fundamental values because professional investors with large amounts of capital counteract mispricings created by “dumb” or “retail” investors. For example, if Dan the DayTrader enters sell(...) A 20% 1-Day Decline In VXO [Quantifiable Edges]Monday’s market rally was accompanied by a big drop in some implied volatility measures. The VXO, which is the old calculation for the VIX, saw a decline of over 22% on Monday. The study below is one I have shown before. It looks at SPX performance the day following VXO declines of 20% or more.(...) Weekly Commentary – Lessons from a Crystal Ball [Flirting with Models]A PDF of this commentary can be downloaded here. Summary Dalbar studies tell us that investors often sell after losses and wait for markets to reclaim high water marks before re-entering – behavior that is guaranteed to lead to underperformance Other, more dynamic, approaches may help investors(...) Investing with Not-So-Perfect Economic Foresight [EconomPic]Following up on my previous post Is there a Relationship Between the Economy and Stock Market?, which outlined the relative performance of the U.S. stock market and underlying U.S. economy over time and market performance during economic expansions / contractions, the below provides further detail(...)