Having your cake and eating it too is a great way to go. It’s great to have the cake, and it’s also great to eat the cake. But you can’t have it both ways. This trend continues when we speak with fellow investors: “Give me high, after-tax, net of fee returns, but with limited risk and volatility.”(...)

Professional investors seem to make a different set of errors than amateurs. In particular, i think they can sometimes take too little risk. For example, many traders try not to hold positions overnight, even though that is when most stock returns accrue. Similarly, a lot of professional option(...)

This post reviews the backtest results of selling one-lot options strangles on the Russell 2000 Index (RUT), initiated at 52 days-to-expiration (DTE). The results in this post were derived from 2336 individual trades entered by the backtester. The results are grouped by the delta of the short(...)

Research Review | 13 Aug 2015 | Portfolio Management Momentum and Markowitz: A Golden Combination Wouter J. Keller, Adam Butler, and Ilya Kipnis May 16, 2015 Mean-Variance Optimization (MVO) as introduced by Markowitz (1952) is often presented as an elegant but impractical theory. MVO is “an(...)

A reader requested a test of the following hypothesis from the article “Gold’s Bluff – Is a 30 Percent Drop Next?”: “Ironically, gold is more than just a hedge against market turmoil. Gold is actually one of the most accurate indicators of the stock market’s long-term direction. The Dow Jones(...)

I. Trading Strategy Concept: Short-term momentum pattern with trend filter. Source: Hill, J. R. (1977). Stock & Commodity Market Trend Trading by Advanced Technical Analysis. Hendersonville, N.C.: Commodity Research Institute, Ltd. Research Goal: Performance verification of 3-Bar Momentum(...)

Frequently Mentioned Python Backtesting Libraries It is essential to backtest quant trading strategies before trading them with real money. Here, we review frequently used Python backtesting libraries. We examine them in terms of flexibility (can be used for backtesting, paper-trading as well as(...)

Steady Vol inversely weights holdings in an asset with respect to current volatility. Initially there was a little confusion about how Steady Vol was different from Low Vol strategies. Low Vol strategies weight individual constituent stocks by their volatility whereas steady vol weights periods(...)

As I have written about in the past (here, here and here) the last five trading days of the month tend to be “the best of times” for t-bonds. T-bonds have showed a particularly strong historical tendency to perform well during the last five days of August. First the chart, then the numbers. Figure(...)

In May 2015, Huseyin Gulen and Ralitsa Petkova published "Absolute Strength: Exploring Momentum in Stock Returns" (SSRN). In the paper they outline their new concept of absolute strength momentum. Momentum, in its traditional form, was a relative strength concept. Momentum took the(...)

I. Trading Strategy Concept: Volatility breakout strategy based on price deviations defined by Minkowski Distance where: Upper_Band = Mean + (Multiple × Deviation); Lower_Band = Mean − (Multiple × Deviation); Deviation((Close)k=1,…,K, Mean) = (∑|Close − Mean|λ ÷ K)1/λ. Minkowski Distance has two(...)

I landed in a town in Western Sumatra called Padang a few days after an earthquake hit. 7 or 8 on the Moment Magnitude scale. Just as in finance there are various ways of measuring quakes. The Richter scale measures ground motion whereas the more modern Moment Magnitude scale measures energy(...)

In the previous 3 articles I discussed backtesting a trading strategy in Excel using the vectorised methodology. This article will cover the same strategy but in R. This article is more of a supplement to the already published article by Joshua Ulrich on FOSS Trading and is for readers looking for(...)

If you want to be sure to be notified about enrollment opportunities, please sign up to “follow” my blog. I will post that information on this blog. The “old” course We’ve had four very successful sessions of my MOOC “Computational Investing, Part I” at Coursera. The Coursera run included over(...)

Authors: Engelberg, McLean, Pontiff Title: Anomalies and News Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2631228 Abstract: Using a sample of 97 stock return anomalies documented in published studies, we find that anomaly returns are 7 times higher on earnings announcement days and 2(...)

This post is based on an article I wrote for Active Trader Magazine. "Buy to the sound of cannons, sell to the sound of trumpets." -Lord Nathan Rothschild, 1810 The Rothschilds were one of the world’s richest families and formed a modern financial dynasty. In 1815 they were rumored to(...)

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 Returns(...)

After publishing our Two Centuries of Momentum article last week, we received a number of requests for our thoughts on the recent underperformance of multi-asset, relative strength portfolios. Now, we tend to fall more on the trend following side of momentum. So we wanted to spend some time talking(...)

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(...)

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(...)

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(...)

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:(...)

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(...)

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(...)

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(...)

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(...)

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(...)

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(...)

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 recall,(...)

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(...)

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(...)

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(...)

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(...)

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(...)

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(...)

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-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,(...)

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 had(...)

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 of(...)

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(...)

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(...)

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(...)

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.(...)

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(...)

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 other(...)

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(...)

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(...)

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(...)

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(...)

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 between(...)