Quant Mashup The Mojito Vix ETN Strategy [John Orford]I like girls like my asset classes. Bubbly. ... What do you mean you don't know whether whether we should take the business or not? All money is green. ... I like my cocktails like my money. Green! ... ~~ That was the CEO sitting behind a younger me. He didn't have an off Light At The End Of The Tunnel For Stocks...Or A Train? [Dana Lyons]So much for summer trading. Global markets are getting more interesting by the day. Last week, we wrote a post examining the phenomenon of 90% Down Days. Again, these are days in which at least 90% of volume on the NYSE occurred in declining stocks. Such days have often been signs of selling(...) The Origins of Momentum [Quants Portal]Momentum is a market anomaly which many people have tried to explain but have not succeeded to a satisfactory extent. As to the source of momentum profits, others have tried to rationalize their origins whereas an opposing school of thought has searched for their origins in behavioural finance. In(...) Research Links: Correlation Networks [MKTSTK]Evolution of worldwide stock markets, correlation structure and correlation based graphs [arXiv] We investigate the daily correlation present among market indices of stock exchanges located all over the world in the time period Jan 1996 - Jul 2009. We discover that the correlation among market(...) A Mid-Summer's Night(mare for) Beans [Jay On The Markets]Grain prices have a long record of exhibiting seasonal price trends. This is due primarily to the fact that the planting, growing and harvesting cycle in the Midwest remains the same year in and year out. In a nutshell: *Planting begins in early spring *Growing takes place during the summer(...) Option Strangle Series - Higher Loss Thresholds [DTR Trading]During the next several weeks, I will show the backtest results for selling Strangles on the RUT and SPX. The prior post, Introduction To Options Strangles, introduced Strangles and compared them with Iron Condors. For this new series, we will look the following setup: RUT and SPX short strangle(...) New academic paper related to #12 - Pairs Trading with Stocks [Quantpedia]We analyse statistical arbitrage with pairs trading assuming that the spread of two assets follows a mean-reverting Ornstein-Uhlenbeck process around a long-term equilibrium level. Within this framework, we prove the existence of statistical arbitrage and derive optimality conditions for trading the(...) XIV a heart attack waiting to happen [Alvarez Quant Trading]A research friend recently sent me a link to The #1 Stock In The World. Besides being a blatant title to get one’s attention (and it worked on me), I found the idea interesting along with my research friends. I have been trying to add either XIV or VXX to my trading in some small way. The article(...) All Strategies Blow Up [GestaltU]We are a quantitative finance shop, right down to the ground. All of our portfolios are driven by supervised quantitative models with no discretionary intervention. As such, I was inspired to respond to a recent article on the risk of quant strategies, as I think the way our team approaches(...) Quantitative Financial Risk Management [Reading the Markets]Quantitative Financial Risk Management: Theory and Practice, edited by Constantin Zopounidis and Emilios Galariotis (Wiley, 2015) is a collection of 15 papers, written primarily by academics. The papers deal with five main topics: supervisory risk management, risk models and measures, portfolio(...) The Comfort of Following the Index by Saarthak Gupta [Factor Wave]FactorWave is built on the premise that factors are important investing. And if these factors are so important, then we should be asking ourselves why everyone doesn't seem to use them. If I may briefly invoke the specter of Rational Economic Theory, in an efficient market, these factors(...) R financial time series tips everyone should know about [R Trader]There are many R time series tutorials floating around on the web this post is not designed to be one of them. Instead I want to introduce a list of the most useful tricks I came across when dealing with financial time series in R. Some of the functions presented here are incredibly powerful but(...) Variance Factors on VIX Futures I – Synthetic Futures [Quanttech]In her paper on ETNs on VIX futures, Carol Alexander demonstrates how principal component analysis can be used to identify the main variance factors in the term structure of the VIX. Over the next couple of posts I am going to demonstrate how you can implement this. Principal component analysis(...) 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(...)