Quant Mashup Value and Momentum are Highly Correlated [Dual Momentum]One of the most popular research papers on momentum is “Value and Momentum Everywhere” by Asness, Moskowitz, and Pedersen. In June 2013, this was published in the prestigious Journal of Finance. I have an earlier blog post which discussed that paper. However, one important item slipped by me(...) Value Investing Research: O-Score and Distress Risk [Alpha Architect]Book-to-Market Equity, Distress Risk, and Stock Returns, by Griffin and Lemmon (2002 Journal of Finance) investigate the relationship between value premiums and distress risk. There are two schools of thought on the value premium, or the large spread in realized returns between cheap stocks and(...) Momentum Premium Explanation [John Orford]Often skewness is elbowed aside while Sharpe ratios are proffered to the Gods. Reminds me of jumping on the subway in Beijing. The S&P 1500 Momentum index has negative skew - more than you see with the S&P 500 - which accounts for higher returns, exactly the reason why value often beats(...) Backtesting in Excel: Adding position sizing [Quants Portal]In my previous article I started with an example of a vectorised backtest. In this one I will build on homework exercise 2 by adding position sizing. Please download this Excel document to follow the example, Click Here. Now there are many different ways in which to add position sizing and this(...) Adding a VIX Signal to Momentum [EconomPic]Michael Batnick, Director of Research at Ritholtz Wealth Management, and blogger of the always interesting Irrelevant Investor, recently shared the historical performance of U.S. stocks when they fall below their 200-day moving average, something that occurred early last week (bold mine, quotes(...) Efficient Frontier Portfolios – Impractical But Still Useful [Capital Spectator]The concept of building “optimal” portfolios—maximizing return and minimizing risk–is a foundational concept in quantitative finance. Unfortunately, it’s not terribly practical. The problem, as many researchers have demonstrated over the years, is the elusive aspect of developing reliable(...) Prices Convolution, A Practical Approach [Quant Dare]othing could be further from my intention than to give an extensive mathematical approach to this post but an slightly idea is desirable. In this post we will approach to the problem of convolution from a matricial point of view. Well, what we mean by convolution is about composing 2 different(...) Practical academic paper related to #100 - Trading WTI/BRENT Spread [Quantpedia]#100 - Trading WTI/BRENT Spread Authors: Donninger Title: The Poverty of Academic Finance Research: Spread Trading Strategies in the Crude Oil Futures Market Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2617585 Abstract: Harvey, Liu and Zhu argue that probably most of the Cross-Section(...) China Market Analysis [John Orford]The core of capitalism is its extremely democratic nature. The masses crush wily contrarians on a daily basis, The market can stay irrational longer than you can stay solvent Being correct in science however, is never democratic. One contrarian can commit mass killings amongst cherished beliefs.(...) Video: James Simons - Numberphile [YouTube]James Harris Simons has been described as "the world's smartest billionaire", amassing a fortune through the clever use of mathematics and computers. He is now a renowned philanthropist. Best Links of the Week [Quantocracy]The best links of the week ending Saturday, 07/04 as voted by our readers: Fitness Landscape Analysis for Computational Finance [Turing Finance] VIX Trading Strategies in June [Volatility Made Simple] Switching From Stocks to Bonds Based on a 200-day Moving Average Crossover [Price Action Lab](...) [Academic Paper] Can Anomalies Survive Insider Disagreements? [@Quantivity]Can Anomalies Survive Insider Disagreements? [Academic Paper] Mispricing Factors [@Quantivity]Mispricing Factors State of Trend Following in June [Au Tra Sy]Another down month for the State of Trend Following index. After a fairly good start to the year – until mid-March where the index registered its high for the year – the trend has been fairly clearly down. Possibly a drawdown phase following the very strong performance from 2014 and beginning(...) Wisdom State of Trend Following - June 2015 [Wisdom Trading]June 2015: Trend Following DOWN -4.16% — YTD: +0.89% After a good start to the year, with the first three months being up and the index peaking in mid-March, a downtrend has now taken place. This has built a drawdown roughly equal to a third of the Max Drawdown figure (12% vs 34%), which is not(...) [Academic Paper] Defining and Dating Bull and Bear Markets: Two Centuries of Evidence [@Quantivity]Defining and Dating Bull and Bear Markets: Two Centuries of Evidence [Academic Paper] Factor Investing Revisited [@Quantivity]Factor Investing Revisited Insuring tomorrow’s decline, today [MKTSTK]As of pixel time the VIX is up over 7% and the S&P 500 is basically unchanged; we feel this situation arises when traders desire protection today for the possibility of danger tomorrow. In other words, the price of risk is rising and markets are stabilizing. Intuitively (i.e. the feeling our rat(...) The First Academic Paper with a Shotgun Picture in it [Alpha Architect]Here is one of the figures in a Journal of Finance paper published in 2013 by N. Garleanu and L Pedersen. The figure depicts various portfolio optimizations under different assumptions and then has a visualization equivalent with hockey players, skeet shooters, and missile systems. I’m not sure(...) Time series analysis and data gaps [EP Chan]Most time series techniques such as the ADF test for stationarity, Johansen test for cointegration, or ARIMA model for returns prediction, assume that our data points are collected at regular intervals. In traders' parlance, it assumes bar data with fixed bar length. It is easy to see that this(...) For The VIX, It’s All About The Recovery [Dana Lyons]We mentioned in a post yesterday on 90% Down Days that one of the challenges for risk managers is to correctly distinguish a minor market “dip” from something that is developing into a more serious decline. One potential aid in addressing that challenge comes from the behavior of the S&P 500(...) Long/Short Hedge Fund Factors: Low-Cost Downside Protection? [Alpha Architect]The holy grail of financial markets is finding strategies that have misaligned risk and reward characteristics. In the traditional view, investors try to do the following: Identify strategies that have high returns, then… find ways to get the exposure with the lowest risk possible. However, there(...) Serial Correlation in Time Series Analysis [Quant Start]In last week's article we looked at Time Series Analysis as a means of helping us create trading strategies. In this article we are going to look at one of the most important aspects of time series, namely serial correlation (also known as autocorrelation). Before we dive into the definition of(...) When Should You Exit Your Iron Condor? [DTR Trading]During the last several posts, we expanded our Iron Condor exit analysis to include results where trades were held to higher loss thresholds. You can review both the first and second sets of articles at the following pages: Dynamic Exit Iron Condor Articles High Loss Threshold Iron Condor Articles(...) Does the VIX Know More than the S&P 500? [Factor Wave]It is commonly believed that option markets are “smarter” than equity markets. There could be several reasons for this. Trading options is mathematically complex. It involves estimating volatility, solving differential equations and devising hedging algorithms. It is true that most professional(...) 1st of Month by Month (Updated) [Quantifiable Edges]A few times over the years I have shared this study. It breaks down the bullish “1st trading day of the month” tendency by month. I thought it would be interesting to take another look at it today. Below is an updated version of the study orginally shown here on July 1, 2009. July has continued(...) Is The Stock Selloff Over -- Or Just Beginning? [Dana Lyons]“Is this to end or just begin?” - All My Love by Led Zeppelin As risk managers, one of the challenges is to determine whether a market pullback is just a minor dip or a precursor to a larger decline. The correct interpretation determines the appropriateness of “buying the dip” versus selling(...) Ivy Portfolio July Update [Scott's Investments]The Ivy Portfolio spreadsheet track the 10 month moving average signals for two portfolios listed in Mebane Faber’s book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term(...) More on the Momentum++ Strategy [John Orford]Glenn@AlignCapital mentioned how the seminal Momentum paper by Jegadeesh and Titman (1993) recommends forming and buying a momentum portfolio a week a part. In the cracks of their beseeching everyone to 'skip a week' and avoid wicked 'short term reversals' I accidentally grew the(...) Forex Trading Diary #7 - New Backtest Interface [Quant Start]Although I've spent the majority of this month researching time series analysis for the upcoming article series, I've also been working on QSForex attempting to improve the API somewhat. In particular I've made the interface for beginning a new backtest a lot simpler by encapsulating(...) The Philosophy of Value Investing - Reject 'New Paradigm" Thinking [Alpha Architect]Every few years, people start to question whether value investing is dead. A recent Google search along these lines generated 3.1 million results: 2015-06-15 10_49_59-the death of value investing - Google Search Likewise, people sometimes question whether the size effect is permanently going away.(...) "Systematic Trading" - the book - now available to pre-order [Investment Idiocy]Isn't it pretty? The website, and pre-order page, for my magnum opus are now ready: www.systematictrading.org http://www.harriman-house.com/book/view/4598/trading/robert-carver/systematic-trading/ Like it says on the back "This is not just another book with yet another trading system. This(...) Fitness Landscape Analysis for Computational Finance [Turing Finance]Some of the most interesting new research coming out of the Computational Intelligence Research Group (CIRG), which is applicable to numerous computational finance and machine learning optimization problems, is the development of fitness landscape analysis techniques. Fitness landscape analysis aims(...) Building a simple moving average (SMA) crossover strategy in Microsoft Excel [Quants Portal]In my previous article I introduced the two main methods of backtesting, vectorised and event driven. In this article I will cover an example of a vectorised backtest in Excel. One of the benefits of using Excel is that you are able to see a visual representation of the data as the model progresses.(...) Getting started with Backtesting [Quants Portal]Foreword by Joshua Ulrich: Jacques reached out to me to discuss the Backtesting in Excel and R series on my blog, FOSS Trading. Inspired by that series, Jacques wanted to create a more detailed explanation of how to backtest a strategy in Excel and R, and then to extend the examples to an(...) Weekend Effect [Factor Wave]This is a phenomenon in the equity markets where the market rises over the weekend. There is still some debate over the existence and persistence of this effect but, as long as we carefully define exactly what we mean it is easy to test this idea. We are going to examine the S&P 500 since 1990(...) Backtesting With Synthetic and Resampled Market Histories [Capital Spectator]We’re all backtesters in some degree, but not all backtested strategies are created equal. One of the more common (and dangerous) mistakes is 1) backtesting a strategy based on the historical record; 2) documenting an encouraging performance record; and 3) assuming that you’re done. Rigorous(...) New related paper to #118 - Time Series Momentum Effect [Quantpedia]#118 - Time Series Momentum Effect Authors: Georgopoulou, Wang Title: The Trend is Your Friend: Time-Series Momentum Strategies Across Equity and Commodity Markets Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2618243 Abstract: Using a dataset of 67 equity and commodity indices from 1969(...) RUT Iron Condor - High Loss Threshold Results Summary [DTR Trading]Over the last six blog posts we looked at eight different exit approaches for a standard RUT iron condor with 20 point wings. These exits included: STD - NA%:NA% - exit at 8 DTE. STD - NA%:50% - exit if the trade has a profit of 50% of its initial credit OR 8 DTE. STD - 100%:50% - exit if the trade(...) [Academic Paper] Lifetime of a Financial Bubble [@Quantivity]Lifetime of a Financial Bubble [Academic Paper] Do Index Futures and ETFs Affect Stock Return Correlations? [@Quantivity]Do Index Futures and ETFs Affect Stock Return Correlations? Best Links of the Week [Quantocracy]The best five links of the week ending Saturday, 06/27, as voted by our readers: Interview with Ernest Chan [Better System Trader] Think MPT Doesn't Work? Clearing Up Some Misconceptions [CSS Analytics] Creating an Open Source Hedge Fund Strategy [Quants Portal] Losing Streak Indicator [System(...) Interview with Andreas Clenow [Better System Trader]Andreas Clenow is a hedge fund manager who specialises in developing and trading quantitative strategies across all asset classes. He is currently a principal at ACIES Asset Management, which he joined after having successfully established his own hedge fund. Prior to his role as a hedge fund trader(...) How regression statistics mislead experts [Eran Raviv]This post concerns a paper I came across checking the nominations for best paper published in International Journal of Forecasting (IJF) for 2012-2013. The paper bears the annoyingly irresistible title: “The illusion of predictability: How regression statistics mislead experts”, and was written(...) Improved Fractal Strategy [John Orford]little scepticism is healthy, however, many of you know the feeling of being plagued non-stop by this awkward feeling. My level of scepticism is always bobbing around unhealthy levels. So it's nice when a guy like Ilya questions numbers and kicks the tyres a little. An opportunity to treble(...) Lazy Backtesting Update [John Orford]The S&P Dow Jones data source is now available to use in the Lazy Backtesting IDE. All manner of interesting investable strategies and asset classes, including volatility and retirement date targeting; Vix contango & backwardation and other quant-style strategies; which you can combine,(...) Bad Breadth Milestone A Warning For Stocks? [Dana Lyons]We’ve been discussing the weakening market breadth recently, especially as it pertains to New Highs vs. New Lows. Again, our contention is that the more stocks participating in a rally, the healthier the rally is. The most recent example of this weak breadth was Wednesday’s post on the fact that(...) [Academic Paper] Structured Products: Performance, Costs and Investments [@Quantivity]Structured Products: Performance, Costs and Investments The Decision Moose Asset Allocation Framework [CXO Advisory]A reader suggested a review of the Decision Moose asset allocation framework of William Dirlam. “Decision Moose is an automated framework for making intermediate-term investment decisions.” Decision Moose focuses on asset class momentum, as augmented by monetary policy, exchange rate and(...) The Market For ‘Lemons’: A Lesson For Dividend Investors [Research Affiliates]Central banks the world over are buying high-quality bonds, thereby removing them from the market and forcing savers to find alternative strategies to meet their income needs. In this environment of financial repression and near-zero interest rates, dividend-yield (or equity income) investing has(...)