Quant Mashup Death of (Plain Vanilla) Value - Long Live GARP [EconomPic]Warren Buffett made news this morning, not just for making the largest acquisition of his career, but for making it at a relatively lofty 22x earnings multiple. Reuters reports: Warren Buffett is paying a hefty price for the biggest acquisition of his career, now that his Berkshire Hathaway Inc has(...) Wisdom State of Trend Following - July 2015 [Wisdom Trading]Summer bounce for our Wisdom State of Trend Following report. A strong up month ends the downslide seen in the second quarter and ensures the YTD performance is more comfortably in the black. Below is the full State of Trend Following report as of last month. Performance is hypothetical. Chart for(...) Bring Data [Dual Momentum]When doing financial modeling, one of the first things to look at is if your empirical work makes sense. In other words, are there valid economic reasons why a model should work? This can help you avoid drawing erroneous conclusions based on creative data mining.[1] Next, you should look for(...) RUT Strangle - High Loss Threshold - 45 DTE [DTR Trading]This is the first article in a series that will review the performance of selling options strangles on the Russell 2000 Index (RUT). For background on the setup for the backtests, as well as the nomenclature used in the charts and tables below, please see the introductory article for this series:(...) Show yourself (look under the hood of a function in R) [Eran Raviv]Open source software has many virtues. Being free is not the least of which. However, open source comes with “ABSOLUTELY NO WARRANTY” and with no power comes no responsibility (I wonder..). Since no one is paying, by definition it is your sole responsibility to make sure the code does what it is(...) Best Links of the Week [Quantocracy]The best quant mashup links for the week ending Saturday, 08/08 as voted by our readers: Two Centuries of Momentum [Flirting with Models] Fooled by Dividend-Induced Upward Drift [Price Action Lab] VIX Trading Strategies in July [Volatility Made Simple] Interview with Scott Andrews [Better System(...) Hello, Market Maker! [MKTSTK]As we have made clear in the past, we are fascinated by the economics of open source software. This business model makes sense for massively scalable and ubiquitous bits of technology, but surely it must be anathema to the closed world of trading, right? This has an intuitive appeal, we know of(...) Momentum Strategies [Quants Portal]Pinto, Henry, Robinson and Stowe (2010) define momentum indicators as valuation indicators that are based on the relationship between price or another fundamental, earnings for example, to a time series of its historical performance or to the fundamental’s expected future performance values. When(...) Battle Of New Factor Models [Larry Swedroe]In their groundbreaking paper, “Digesting Anomalies: An Investment Approach,” Kewei Hou, Chen Xue and Lu Zhang proposed a new four-factor asset pricing model that goes a long way toward explaining many of the anomalies neither the Fama-French three-factor nor subsequent four-factor models could(...) Selecting an Appropriate Benchmark [Quantlab.co.za]Introduction I have the privilege of working with two of the sharpest minds in the industry. Last week I had a discussion with them via email about selecting a suitable benchmark for the strategies I run. I was specifically questioning them on the use of cash returns as a benchmark. This is a(...) The Junkie Market, Part lll - Too Many NYSE AND Nasdaq Highs & Lows [Dana Lyons]This brief post will serve as the coup de grace for our “Junkie Market” series. By that, we are referring to days on which there are numerous (in this case, at least 100) new 52-Week Highs AND 52-Week Lows. We have covered such occurrences on the NYSE and the Nasdaq exchanges. If you’ll(...) Private Equity Replication with Leveraged Small-Cap Value Stocks [Alpha Architect]Of the major asset classes, private equity has recently had the best absolute returns. According to Cambridge Associates, the 25-year return on private equity was 13.5%, relative to 9.75% for the Russell 2000. Academic studies, surveyed recently by Steven Kaplan and Berk Sensoy, have consistently(...) Systems building - accounting [Investment Idiocy]If you tell someone you're trading, the first thing they'll usually ask is "Have you made any money?" It isn't usually this easy to tell if a trader has made money or not Most traders I've known are pretty obsessed with that question as well. Knowing the answer to that(...) SPX Strangle - Backtest Results Summary [DTR Trading]Over the last six blog posts we looked at the backtest results for over 13,900 options strangles sold on the S&P 500 Index (SPX). Eight different exit approaches were tested on these strangles, including: Strangle (100:50) - exit if the trade has a loss of 100% of its initial credit OR if the(...) Hedge Hunting: Wrangling the VIX [Flirting with Models]Summary Diversification and trend-following often fail to protect investors in sudden, tail-risk events By being constantly hedged to such events, investors can help manage this risk, but remaining hedged requires paying an often significant “insurance premium” Spot CBOE VIX would be a great(...) The January Effect in International Markets [Factor Wave]In the second post on the price factor, Leo Cheng commented that "I (sic) remember reading somewhere that the low price stock January effect is due to fund managers taking extra risk in January. Their bonus is usually calculated every reporting year (December) and the best way to begin the year(...) Fama-French five factor asset pricing model [Quants Portal]The relationship between risk and return has long been a topic for discussion and research. Investors and investment managers seek financial models that quantify risk and translate that risk into estimates of expected return on equity (Mullins, 1982). This post will look at and discuss the(...) New research paper shows how to easily improve #5 - FX Carry Trade [Quantpedia]Recent research has confirmed the behaviour of traders that significant excess returns can be achieved from following the predictions of the carry trade which involves buying currencies with relatively high short-term interest rates, or equivalently a high forward premium, and selling those with(...) Short Term T-Bill Momentum [John Orford]Short term t-bills are an astoundingly bad investment. The Sharpe ratio is 0.047 over 50 years - a tenth of the S&P 500. The skew is negative and Max Wait to profitability is 14 years! The Sharpe Trajectory shows that the IRX (13 week t-bill) index is all over the place - extremely inefficient,(...) Maximum Loss Stops: Do you really need them? [Alvarez Quant Trading]We hear it all the time. “You must use stops.” And most of us use them. But do you know how they change your strategy results? Are they improving your results by giving you higher CAR or lower maximum drawdown? Recently I was speaking with a reader about this topic and he insisted that it you(...) Two Centuries of Momentum [Flirting with Models]A momentum-based investing approach can be confusing to investors who are often told that “chasing performance” is a massive mistake and “timing the market” is impossible. Yet as a systematized strategy, momentum sits upon nearly a quarter century of positive academic evidence and a century(...) Turn of the Month Effect in Commodities [Factor Wave]I've been thinking about applying factor analysis to commodity futures. People have studied this idea but commodity factors have not been studied to the same degree as equity factors. This is to be expected. Stocks are parts of companies and there are many commonalities between the operations(...) When Bonds Act Like Stocks [Larry Swedroe]Research into the determinants of fixed-income returns have found that a number of stock and bond market risk factors can be shown to demonstrate explanatory power beyond the standard term-structure variables. Ivelina Pavlova, Ann Marie Hibbert, Joel Barber and Krishnan Dandapani—authors of the(...) Expensive Junk Stocks are Killing High-Quality Value Stocks, YTD [Alpha Architect]In general, investors focused on affordable stocks with strong fundamentals have been taken to the cleaners year-to-date. Meanwhile, expensive stocks with poor fundamentals have been rocking! Some Basic Statistics: Below we document some core performance figures using Ken French’s data on(...) 2 Ways to Lower Portfolio Drawdown [Flirting with Models]The financial crisis of 2007 to 2009 highlighted the importance of downside risk management. Many managers that protected capital during this period saw their AUM balloon. Some of these same managers underperformed in the post-crisis years. This underperformance should be anything but surprising. We(...) Backtesting in Excel: Adding a Stop Loss [Quants Portal]In my previous article I went over how to add a position sizing rule and in this one I will complete homework exercise 2: adding a stop loss and trailing stop loss. Adding a stop loss in R is way easier than building it into Excel, I had to think for some time as to how I was going to break it down(...) Prepared: Market Breakout or Breakdown? [Flirting with Models]This week we received an email from an advisor that echoes some calls we’ve been receiving lately. We thought it would make a great topic for us to cover in our commentary this week. The email read: We’re seeing a lot of negative indicators in the market right now, and seeing commentary from(...) A Quant's view of CFA Level I [Turing Finance]Having just written and, thankfully, passed the CFA Level I exam I wanted to take this opportunity to share my experience writing the CFA Level I exam given that I come from an unconventional academic background and work in the industry as a quantitative analyst. I also want to share some helpful(...) The Ornstein-Uhlenbeck process and pairs trading [MKTSTK]Perhaps the most widely known form of statistical arbitrage is called Pairs Trading. In this general strategy, we start first by picking two stocks which are highly related to one another (either by correlation, cointegration, or both). One method for finding such pairs is to use a network graph(...) Daily Academic Alpha: Warren Buffett Market Predictions [Alpha Architect]Last week we had a fairly long post on a valuation based asset allocation strategy that might actually work. This post followed a couple of other research projects on the issue, which showed limited evidence for simple valuation-based timing strategies. Now there is a new paper on Warren Buffett’s(...) Do the VIX Futures Know More Than the S&P 500? [Factor Wave]A while ago I wrote a post, "Does the VIX Know More Than the S&P 500?", and concluded "when the VIX and the S&P 500 are both up on the day sell the stocks, either through the futures of an ETF. " An astute reader, Leo Cheng, pointed out that the VIX index has a certain(...) Sizing Up the Size Premium (h/t @Abnormal Returns) [Gerstein Fisher]Since Rolf Banz published his groundbreaking paper that identified the so-called “small stock effect” in 1981, the investment community has acknowledged the existence of a return premium afforded to smaller-capitalization stocks over their larger counterparts. Banz’s study demonstrated that(...) The Carry Trade Defies Theory [Larry Swedroe]The success of the carry trade strategy has led to its widespread proliferation, despite the fact that it contradicts economic theory. In short, this strategy involves borrowing (going short) a currency with a relatively low interest rate and using the proceeds to purchase (going long) a currency(...) Interview with Scott Andrews [Better System Trader]Scott Andrews is the CEO and Co-Founder of InvestiQuant. Scott has been trading full time since 2004, finding great success trading the opening gap and launching MasterTheGap.com in 2008. Scott has published over 1,500 daily gap analysis videos and his exact gap trading plan prior to the market open(...) Ivy Portfolio August 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(...) Quantocracy's Best Links in July [Quantocracy]The best links for the month of July, as voted by our readers: P/E “Attention” Strategies Earn Monthly Excess Return of 1% [Alpha Architect] Back to Fundamentals [Dual Momentum] New Paper from Markowitz: Introducing the Gerber Statistic [Flirting with Models] Video: James Simons – Numberphile(...) Betting Against Days to Cover [Alpha Architect]Abstract: The short ratio — shares shorted to shares outstanding — is an oft-used measure of arbitrageurs’ opinion about a stock’s over-valuation. We show that days-to-cover (DTC), which divides a stock’s short ratio by its average daily share turnover, is a more theoretically(...) SPX Strangle - High Loss Threshold - 80 DTE [DTR Trading]SPX Strangle - High Loss Threshold - 80 DTE This post looks at selling one-lot options strangles on the S&P 500 Index (SPX), initiated at 80 days-to-expiration (DTE). The results in this post were derived from more than 2300 individual trades entered by the backtester. Other 80 DTE variations(...) Political Contributions and Stock Returns [Factor Wave]We are now about a year and a half away from the next presidential election. This means that the campaigning has been underway for over a month. Quite why the electioneering needs to last for a third of a presidential term is beyond me, but that might just be because I am a closet communist(...) Algorithm Aversion - Why people don't follow the model! [Alpha Architect]There are many studies showing that models beat experts, including the meta-study “Clinical versus mechanical prediction: A meta-analysis” by Grove et al. (2000). However, given this knowledge that models beat experts, forecasters still prefer to use the human (expert) prediction as opposed to(...) Synchronicity [MKTSTK]Recently we read an excellent article on investing from Alpha Architect entitled One way to beat the market? Be different! In the article, the author shows how thinking differently from the pack can provide better performance for your investment portfolio. As often happens with lateral thinking,(...) Trading the VIX over the Fed Announcement [Factor Wave]"Buy the rumor, sell the fact" is an over-used phrase traders say to describe the way the equity markets get excited by future events then lose steam when the event actually happens. Because the VIX is strongly negatively correlated with the equity markets, this could be changed to(...) Simple volatility rebalancing strategy [Volatility Fighter]In my posts, I often mention a volatility rebalancing strategy. Originally, this strategy supposed to rebalance a portfolio daily to local volatility measured by standard deviation. I strongly suspect, that a common retail investor will stop trying to understand this strategy right after words(...) Dynamic Markowitz Efficient Frontier [Quant Dare]Markowitz Model is a famous method allocated in the Portfolio Investment Theory. This model provides efficient portfolios, i.e. portfolios with the highest rentability and lowest risk possible through mathematical programming. The set of portfolios composes the efficient frontier. The strategy is(...) The Information from Insiders [Factor Wave]One of the things that “everyone knows to be true” is that the trades of company insiders convey valuable information. But is this really true? And are some types of trades more informative than others? If you can get hold of the relevant data, this is the sort of question that is very amenable(...) Australia All Ords Steady Vol Strategy [John Orford]In a round about way from New York to Singapore, I landed in Oz in 2012. It was like walking into a pre '08 New York or Ireland with funnier accents. They call '08 the 'GFC' or the 'Global Financial Crisis' and talk about it in a sort of detached way - because that(...) Momentum Crashes [Quants Portal]Seminal work by Jegadeesh and Titman (1993) found that past winners outperform past losers over a horizon of 3-12 months. Investors thus take a long position on winner stocks and a short position on loser stocks in order to realise anomalous profits. This strategy is widely adopted and appears to be(...) Sports Betting used to explain Value and Momentum Effects [Quantpedia]I use sports betting markets as a laboratory to test behavioral theories of cross-sectional asset pricing anomalies. Two unique features of these markets provide a distinguishing test of behavioral theories: 1) the bets are completely idiosyncratic and therefore not confounded by rational theories;(...) Liquidity Premium Diminishing [Larry Swedroe]Liquidity can be described as the ability to trade a large number of investments quickly, at low costs and when you want to. Because it is a priced risk, liquidity and its associated price effects are an important aspect of financial markets. In illiquid markets, such as the private equity market,(...) [Academic Paper] Risk Premia in Option Markets [@Quantivity]Risk Premia in Option Markets