Quant Mashup Data-driven Approach to Clustering Similar Macroeconomic Regimes [Alpha Architect]The research team at Verdad does some of the most interesting and innovative empirical financial research that is consistently rigorous and based on systematic approaches that are implementable and replicable, providing confidence in the findings. In a recent piece, “Analogous Market Moments,”(...) Trend-Following Filters – Part 8 [Alpha Architect]Regression analysis is a statistical method used to estimate and model the relation between a dependent variable and one or more independent variables. The dependent variable, also called the observation, is the variable being explained or predicted. The Independent variables are used to explain or(...) How to Improve Commodity Momentum Using Intra-Market Correlation [Quantpedia]Momentum is one of the most researched market anomalies, well-known and widely accepted in both public and academic sectors. Its concept is straightforward: buy an asset when its price rises and sell it when it falls. The goal is to take advantage of these trends to achieve better returns than a(...) Revisiting Trend-following and Mean-reversion Strategies in Bitcoin [Quantpedia]Over the past few years, significant shifts in the financial landscape have reshaped the dynamics of global markets, including the cryptocurrency sector. Events such as the ongoing war in Ukraine, rising inflation rates, the soft landing scenario in the US economy, and the recent Bitcoin halving(...) The devil is in the details [Quantitativo]“The group coined a name for the difference between the prices they were getting and the theoretical trades their model made without the pesky costs. They called it The Devil.” Gregory Zuckerman. The quote above is from the great book The Man Who Solved the Market. In it, Gregory Zuckerman tells(...) Investors trade Cryptos and Trad-Fi Differently [Alpha Architect]The paper examines several key questions related to how retail investors’ trading behaviors in cryptocurrencies differ from their behaviors in traditional asset classes like stocks and commodities. Are cryptos different? Evidence from retail trading Shimon Kogan, Igor Makarov, Marina Niessner,(...) Exploring Bond Tax Efficiency: Futures or Bond ETFs? [Alpha Architect]Bond futures are often assumed to be more tax-efficient than bond ETFs. My analysis indicates that this assumption is frequently incorrect. Although investors might view the 60/40 tax treatment of futures as advantageous, a futures strategy faces several challenges compared to a bond ETF, including(...) Adding Leveraged, Long-Short Factor Strategies to Improve Tax Alpha [Alpha Architect]Empirical research, including the 2020 study “An Empirical Evaluation of Tax-Loss Harvesting Alpha” and the 2023 study “Expected Loss Harvest from Tax-Loss Harvesting with Direct Indexing,” has found that tax-loss harvesting strategies in separately managed accounts (SMAs) can improve the(...) Research Review | 6 September 2024 | Portfolio Risk Management [Capital Spectator]Semivolatility-managed portfolios Daniel Batista da Silva (U. of Geneva) and M. Fernandes (Getulio Vargas Fnd.) July 2024 There is ample evidence that volatility management helps improve the risk-adjusted performance of momentum portfolios. However, it is less clear that it works for other factors(...) Python Libraries for Quantitative Trading [Quant Start]For anyone looking to dive into the world of quantitative finance and systematic trading, Python is an indispensable tool. As the go-to programming language for many quant developers, Python offers a vast ecosystem of libraries that streamline everything from data analysis to strategy execution.(...) Insights from the Geopolitical Sentiment Index made with Google Trends [Quantpedia]Throughout history, geopolitical stress and tension has been ever-present. From ancient civilizations to today’s world, global dynamics have been largely shaped by wars, terrorism, and trade disputes. Financial markets, as always, have keenly observed and been significantly influenced as a result.(...) Book Reviews and Reading List [Mark Best]How do you eat an elephant? I have wanted to write a reading list but I have been apprehensive since I didn’t want to include too much and wanted also to explain why the books were in the list. If you want to trade crypto there is no point reading the Hull interest rate model book. This list(...) Can smart rebalancing improve factor portfolios? [Alpha Achitect]This paper aims to test an effective rebalancing method that prioritizes trades with the strongest signals to capture more of the factor premium while reducing turnover and trading costs. The authors coin the term “smart rebalancing” to capture the essence of their ideas. The empirical tests(...) Coding live forward tests [Quantitativo]"Testing leads to failure, and failure leads to understanding.” Burt Rutan. In the 1960s, NASA was racing to land a man on the moon, and the success of the Apollo 11 mission hinged on the performance of the Lunar Module (LM). The LM had to operate flawlessly in the harsh, unpredictable(...) Closing the loop [OSM]Summer has a way of getting away from you. That is as much relevant for blog writing as it is for life. Nonetheless, before summer ends we wanted to dust off our series on regime prediction and close the loop on the remaining techniques we had yet to investigate. That is, in our last post we(...) Overnight Reversal Effects in the High-Yield Market [Quantpedia]High-yield bond ETFs represent a unique financial vehicle: they are highly liquid instruments that hold inherently illiquid securities, creating a fertile ground for predictable market behaviors. Our latest research uncovers an intriguing anomaly within these ETFs, similar to those observed in the(...) Long & Short Mean Reversion Machine Learning [Quantitativo]"There is no magic in magic; it's all in the details.” Walt Disney. As most creative people are, I'm a huge fan of Walt Disney and his attention to detail. One of the most famous stories about his attention to detail involves a seemingly small problem with light bulbs on Main(...) From Man vs. Machine to Man + Machine: The Art and AI of Stock Analyses [Alpha Architect]The research questions are as follows: How does AI perform compared to human analysts in predicting stock returns? Under what circumstances do human analysts retain their advantage over AI? What is the impact of combining human analysts with AI (the “Man + Machine” approach) on stock prediction(...) Lunch Effect in the U.S. Stock Market Indices [Quantpedia]In the complex world of financial markets, subtle patterns often reveal themselves through careful observation and analysis. Among these is the intriguing phenomenon we can call the “Lunch Effect,” a pattern observed in U.S. stock indexes where market performance tends to exhibit a distinct(...) Battle of the Back-Testers [Algorithmic Advantage]Allow me to share a few thoughts that came up as we brought together two exceptional minds in the trading technology space to talk about their back-testing applications. In the blue corner representing Python - Jason Strimpel, an experienced quantitative risk manager, trader and technology leader,(...) Bear Markets Through the Decades [Alvarez Quant Trading]Several months ago, Steven (my trading buddy) and I were talking about bear markets. I felt that bear markets seem shorter and shallower now compared to the past. I thought this would be a quick and easy research project and blog post. Nope. As I generated numbers, more questions and research paths(...) Optimal allocation to cryptocurrencies in diversified portfolios – update [Artur Sepp]Cryptocurrencies have been acknowledged as an emerging asset class with a relatively low correlation to traditional asset classes and independent drivers of their long-term performance (see for an example excellent papers by Harvey et al (2022) and Adams at al (2024)). A year ago in Summer of 2023,(...) How to Replicate Trend Following Managed Futures [Invest Resolve]Trend-following managed futures strategies offer a compelling opportunity for investors to diversify their portfolios beyond traditional stocks and bonds. By capitalizing on persistent trends across a wide range of liquid futures markets – from commodities to currencies to equity and bond(...) Machine Learning and the Probability of Bouncing Back [Quantitativo]“Learn the rules like a pro so you can break them like an artist.” Pablo Picasso. Picasso painted “Woman with a Book,” one of his masterpieces, a few months before my grandmother was born. He was a legendary artist, a true master whose creativity and invention made him one of the most(...) Ehlers’ Precision Trend Analysis [Financial Hacker]In TASC 8/24, John Ehlers presented a new algorithm for separating the trend line from a price curve, using spectral analysis functions. Trend lines are only useful for trading when they have little lag, so that trend changes can immediately trigger trade signals. The usual suspects like SMA, WMA,(...) Fixing the poor performance of the book-to-market ratio [Alpha Architect]While the research, commentary and speculation about the failure of value factor strategies over the last decade or two continues along a number of avenues, we haven’t yet seen a movement back towards fundamental analysis or a discounted cash flow (DCF) approach. In this paper, the authors argue(...) Even Faster Logging in Rust! [Mark Best]I was re-reading some older posts, and I realised I owed some readers a follow up. Hopefully I will be forgiven that this took 2 years. This post will be short and the core of the ideas are a follow up to the original article here. The key takeaways from the original article are: IO and Logging(...) Tax management: does it benefit portfolio returns? [Alpha Architect]As a result of the trading required to capture the premiums that drive factor strategies investors may face significant tax liabilities. The challenge for the portfolio manager is to incorporate tax-efficient trading practices at each rebalance to mitigate tax impacts and ultimately avoid(...) Trading ETFs while fear and greed rise [Quantitativo]"The first principle is that you must not fool yourself, and you are the easiest person to fool.” Richard Feynman Richard Feynman was one of the great scientists and physicists of our time, truly one of the great minds of humanity. This is one of my favorite quotes from him. It emphasizes the(...) The Value of WallStreetBets Investment Research Recommendations [Alpha Architect]Wallstreetbets has become an increasingly prominent source of investment research, particularly for risk-seeking retail investors. The excitement from the GameStop episode resulted in the forum growing from 500,000 users in July of 2018 to 10.7 million users by June 2021. Do their recommendations(...) Excess Earnings Yield Dynamic Valuation Strategy [Allocate Smartly]This is a test of the “Excess Earnings Yield Dynamic” valuation strategy based on the paper Man Doth Not Invest by Earnings Yield Alone by White and Haghani of Elm Wealth. The strategy dynamically splits the portfolio between stocks and TIPS based on “excess earnings yield”, which is the(...) Rob Hanna is a quant blogging OG: Streaking Longer than Ripken [Quantifiable Edges]About a month ago, I hit a major milestone with Quantifiable Edges. I passed Cal Ripken. For those that don’t know, Cal Ripken was a Hall-of-Fame shortstop (and also a 3rd baseman) with the Baltimore Orioles from 1981-2001. He holds the record for consecutive games played (2,632). His streak(...) This was essentially my first quant strategy 20+ ago. To reiterate: Real-world results less optimistic [Quantitativo]"Mistakes are the portals of discovery." James Joyce. I think this is my best post so far. It's not because of any particular great results (although they are nice). It's because I got help from three extraordinary people: a Market Wizard and a couple of traders who talked about(...) Bayesian Solutions and Linear Asset Pricing Models [Alpha Architect]What is a Bayesian solution? Good question. Bayesian statistics, named for Thomas Bayes, is a structured framework that allows one to update the probability of an event occurring as new data about that event becomes available. In the context of the infamous Factor Zoo in investing, Bayes’ rule(...) New Contributor: Does High Interest Rate Volatility Predict Market Turbulence? [Myalo]There have been a great deal of studies assessing the stylized facts of Equity volatility: The tendency of volatility regimes to persist The higher volatility regimes' association with lower forward returns We’re extending these by uncovering cross-asset lead-lag relationships that -(...) This was essentially my first strategy more than 20 years ago. Real-world results less optimistic [Quantitativo]"It's not that I'm so smart; it's just that I stay with problems longer.” Albert Einstein. I love this quote from Einstein. It shows the importance of persistence and perseverance in the face of challenges. This mindset emphasizes the value of hard work and resilience, which is(...) Portfolio Hedging with Put Options [Robot Wealth]There are 2 good reasons to buy put options: Because you think they are cheap Because you want downside protection. You want to use the skewed payoff profile to protect a portfolio against large downside moves without capping your upside too much. The first requires a pricing model. Or, at the(...) The Impact of Amortizing Volatility across Private Investments [Alpha Architect]While publicly traded stocks, bonds, and real estate have their prices constantly adjusted throughout the day, leading to lots of volatility, private capital managers have significant discretion as to when and how they mark-to-market or mark-to-model their portfolios (typically valued quarterly).(...) Research Review | 18 July 2024 | Artificial Intelligence and Finance [Capital Spectator]The Finance AI Challenge: An Evaluation of the Top Six Free Web-based AI Models David Krause (Marquette University) June 2024 This article evaluates six free web-based AI models-ChatGPT, Gemini, Copilot, Claude, Perplexity, and Meta AI-in their performance on finance-related tasks. Utilizing a(...) Pragmatic Asset Allocation from Vojtko and Javorska of Quantpedia [Allocate Smartly]This is a test of Pragmatic Asset Allocation from Vojtko and Javorská of Quantpedia. While the strategy is “tactical” (i.e. changes allocation over time in response to market conditions), it’s also designed to ensure tax efficiency. We track many tactical strategies that have been tax(...) Managed Futures versus Market-Neutral Multi-Factor Investing [Finominal]Managed futures and market-neutral factor investing offered uncorrelated returns to stocks However, these two alternative strategies exhibited similar trends in correlations to equities Having exposure to both does not generate superior diversification benefits INTRODUCTION At first glance, the(...) Diversification for Trend Following Models [Algorithmic Advantage]In the realm of trend following, one prevailing assumption is that highly correlated assets should not be traded together, as they are unlikely to provide diverse opportunities. However, this article will challenge this notion by delving into the nuances of trade correlations versus price(...) A portfolio of strategies [Quantitativo]“Don't look for the needle in the haystack. Just buy the haystack.” Jack Bogle. Harry Markowitz's Modern Portfolio Theory (MPT) revolutionized the field of investment management by providing a quantitative framework for portfolio construction and diversification. He is considered the(...) The Lifting Power of Outliers [Algorithmic Advantage]In previous posts, we’ve explored how massive diversification serves as a crucial tool for outlier hunters—not only to provide correlation benefits in chaotic regimes but also to increase our chances of capturing rare market events. It’s the frequency of these outliers in our trade(...) Extracting Structured Datasets for Systematic Strategies from Unstructured Textual Sources [Quant Rocket]Natural Language Processing (NLP) is a broad field that enables computers to process and analyze unstructured textual data. In this article, we present several proprietary Brain datasets derived from news articles, SEC regulatory filings, and earnings calls, along with case studies implemented in(...) Low-priced stocks: do they impair performance? [Alpha Architect]It is well documented in the literature that retail investors have an irrational preference (from a traditional finance perspective) for investing in high-volatility stocks which have lottery-like distributions—those that exhibit positive skewness and excess kurtosis (fat tails). Studies, such as(...) Capital Market Assumptions: Combining Forecasts for Improved Accuracy [Portfolio Optimizer]Capital market assumptions1 (CMAs) are forecasts of future risk/return characteristics for broad asset classes over the next 5 to 20 years produced by leading investment managers, consultants and advisors2. These forecasts are well-reasoned, analytically rigorous assumptions about uncertain future(...) Unified Approach for Hedging Impermanent Loss of Liquidity Provision [Artur Sepp]Let me introduce our research paper co-authored with Alexander Lipton and Vladimir Lucic for hedging of impermanent loss of liquidity provision (LP) staked at Decentralised Exchanges (DEXes) which employ Uniswap V2 and V3 protocols. Uniswap V3 protocol allows liquidity providers to concentrate(...) Multi-Strategy Hedge Funds & Replication ETFs [Finominal]Despite stellar returns of some multi-strategy hedge funds, the category has not gained market share Multi-strategy hedge funds are highly correlated to equities, offering limited diversification benefits Replication ETFs offer the same unfavorable characteristics INTRODUCTION In 2022 multi-strategy(...) Portfolio Optimization with PyBroker [Ed West]Portfolio optimization is a method for allocating assets in a portfolio in order to meet specific objectives. For example, it can be used to construct a portfolio of assets with the objective of minimizing risk while also maximizing returns. Portfolio optimization can be a useful technique for(...)