Dynamic Volatility Weighting in the Presence of Transaction Costs

Crowded Spaces and Copycat Risk Management

Stop losses are a form of trend following in which you switch from risky assets, such as stocks, to a risk-free or fixed income asset after there are pre-determined cumulative losses. The random walk hypothesis (RWH) was widely accepted in the 1960s and 1970s. It was synonymous with market(...)

Always outnumbered but never outgunned. That's how the saying goes. But this time you are outgunned and staring death squarely in the face. In the moments before your final reckoning, you think about your children, husband - and the impending invasion. This is it. And that is precisely what(...)

Price to sales is a very simple valuation ratio. It has the tendency to bias you towards lower margin and higher debt companies, all else equal, but it has still been a very effect measure of cheapness and a fine standalone factor for stock selection. Having explored the history of the ratio, let’s(...)

There's a phrase or attitude in and around Java called pasrah. Maybe it's dying out only surviving in some out of the way places which haven't been totally submerged in bit and bytes. Pasrah means 'resignation'. Train doesn't come on time? Pasrah. Stuck in a humungous(...)

It is well known that an efficient portfolio should be comprised by uncorrelated assets. The objective is to cover possible widespread falls of all portfolio’s assets. But, what actually is the negative effect of investing in correlated assets? Does the correlation benefit at anytime? How often(...)

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(...)

The academic study of price momentum has intensified considerably since 1993, the year Narasimhan Jegadeesh and Sheridan Titman's paper, "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," appeared in The Journal of Finance. The authors found(...)

Lots of posts in the past week about breaking down time series returns into momentum and mean reversion. Vix Equity Momentum Mean Reversion + Momentum strategy Now you can PCA too! I have added an interface to the code I have been using and called it Lazy PCA. Try it out and let me know what you(...)

Following on from my PCA posts (1, 2, 3) I decided to write a strategy based on them for the Lazy Backtesting IDE. Two combined together in fact. If momentum has been detected, go long when the last day's return is positive and vice versa. Do the opposite when mean reversion is detected. Plus,(...)

This post looks at a standard (STD) one-lot iron condor on the Russell 2000 Index (RUT), initiated at 59 days-to-expiration (DTE). The results in this post were derived from approximately 3200 individual trades entered by the backtester. For background on the setup for the backtests, as well as the(...)

Many investors are getting excited about the so-called “profitability factor,” originally posed by Novy-Marx (here is an alternative story) . Larry Swedroe has a high-level piece advocating the concept here. The basic idea is simple: Other things being equal, firms with high gross profits (revenue(...)

Check out the first and second posts in this series to get up to speed. This is a picture of AAPL's monthly returns over the last 3 years. It shows ever so slightly more momentum than mean reversion as the ellipse is pointing up right. In contrast to the previous equity and Vix pictures the(...)

#21 - Momentum Effect in Commodities #22 - Term Structure Effect in Commodities Authors: Benham, Walsh, Obregon Title: Evaluating Commodity Exposure Opportunities Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2602885 Abstract: Commodities as an asset class have been in growing demand(...)

We know that markets overdo it at extremes. At the market level, we call these bubbles or manias, panics or crashes. At the stock level, we call them glamour and value. Let’s collect some lessons from the best performing stocks from the two categories where investors have the most extreme (good or(...)

What are the most pressing systematic weaknesses in financial research, and how should the investment community address them? In the May 2015 version of his article entitled “The Future of Empirical Finance”, Marcos Lopez de Prado identifies three major problems in empirical finance and proposes(...)

This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook. If you promise to write a review, go here and I’ll send you a free copy. —- “I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting there(...)

This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook. If you promise to write a review, go here and I’ll send you a free copy. —- Warren Buffett mentioned asset allocation instructions for his trust in his 2013 shareholder letter: “What I advise here is(...)

This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook. If you promise to write a review, go here and I’ll send you a free copy. —- “Because for any given level of return, if you diversify, you can generate that return with a lower risk; or for any given level of(...)

Last time I had a look at the Vix's returns plotted against each other with a quarter lag. Now I am doing the same with the S&P 500. Whereas the Vix's returns were mostly found in the bottom left corner and reflected positive skew, I promised equities would be in the top right and(...)

The Utilities Divergence $XLU

This post looks at a standard (STD) one-lot iron condor on the Russell 2000 Index (RUT), initiated at 52 days-to-expiration (DTE). The results in this post were derived from approximately 3200 individual trades entered by the backtester. For background on the setup for the backtests, as well as the(...)

Are there intractable weaknesses of historical inference as a tool to predict the behaviors of financial markets? In the May 2015 draft of his article entitled “Beyond Backtesting: The Historical Evidence Trap”, Ulrich Hammerich briefly describes four weaknesses of backtesting more difficult to(...)

Working Your Tail Off: Active Strategies vs. Direct Hedging

This will be my last post on this blog for an indefinite length of time. I will also include an algorithm to query Quandl’s SCF database, which is an update on my attempt to use free futures data from Quandl’s CHRIS database, which suffered from data integrity issues, even after attempts to clean(...)

Quants sweat over time more than anything else. Calendars, holidays and when payments land are scrutinised over and over. I remember an infamous hedge fund manager making a stink over our inability to capture Middle Eastern weekends starting on Fridays and the trading week starting on Sundays. Or(...)

Note from Mike: This link is self-promotion for sure, but there are some interesting numbers included about QuantConnect vs Quantopian (veracity unknown), so I thought I'd share.

To install Systematic Investor Toolbox (SIT) please visit About page. Newfound Research shared an interesting post: Volatility Through a Different Lens that features a chart of Sector Energy ETF(XLE) with historical price scenarios highlighted with various colors. This reminded me of the post i(...)

I love reading and listening to people who make finance sound like playing with Lego. Everything clicks together and is so self explanatory. Meanwhile, I am wracked by anxieties, because nothing I 'know' about finance really works consistently. Imagine buying a croissant at your local(...)

On Thursday I had an article published in ProActive Advisor Magazine. It talked about evolving markets and used a seasonality example to show how change occurs. You may find a link to it below: http://www.dppublishinginc.com/publication/?i=261185&p=12

The only rational way to value capital is by estimating your required risk premium against a safer benchmark expected return. This is why the correlation between investment grade bonds, Treasury yields and the S&P 500 earnings yield follow such similar shapes. Screen Shot 2015-06-06 at 7.48.31(...)

The returns in the previous quarter (x axis) are plotted against those in the next quarter (y axis) and I fit an ellipse to the data. Every ellipse has two radii or 'semi-axes' which represent the two principal components of the data. PCs are 'idealised' axes which better fit or(...)

Profitability of Pairs Trading Strategies: Distance, Cointegration, and Copula Methods

215 Years of Global Multi-Asset Momentum: 1800-2014 (Equities, Sectors, Currencies, Bonds, Commodities and Stocks) (Geczy and Samonov) The Effect of Past Performance Framing on Investors’ Belief Updating (Gerhard, Hoffmann and Post) Mutual Fund Investors Seem to Be Chasing Overpriced Funds?(...)

June officially marks the arrival of the dreaded “summertime trading.” This time period (June, July, and August of each year) is abhorred by most traders because trading ranges and volumes shrink, momentum becomes scarce, and it is more difficult to make money. The social media universe is already(...)

Just in case you somehow missed the 12,356 obligatory “Sell in May” related articles (alas, including this one), let me just say either: You didn’t financial articles very often do you? or Congratulations on recovering from your coma and Welcome Back! Either way, the gist of conventional wisdom is(...)

This post looks at a standard (STD) one-lot iron condor on the Russell 2000 Index (RUT), initiated at 45 days-to-expiration (DTE). The results in this post were derived from approximately 3200 individual trades entered by the backtester. For background on the setup for the backtests, as well as the(...)

This post will feature the differences in the implementation of my constrained critical line algorithm with that of Dr. Clarence Kwan's. The constrained critical line algorithm is a form of gradient descent that incorporates elements of momentum. My implementation includes a(...)

A June 2012 study authored by University of Rochester professor Robert Novy-Marx, “The Other Side of Value: The Gross Profitability Premium,” not only provided investors with new insights into the cross section of stocks returns, but also led to the development of new factor models that incorporate(...)

#20 - Volatility Risk Premium Effect Authors: Li, Wang Title: Option-Implied Downside Risk Premiums Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2603857 Abstract: This article examines downside risk premiums using S&P 500 index (SPX) options. Portfolios are constructed using the(...)

Europe correction nearing 10% $DAX

The Social Science Research Network’s Econometrics: Mathematical Methods and Programming eJournal distributes working and accepted paper abstracts in the area of mathematical methods applied to econometrics. The journal maintains a list of the All Time Top Ten Papers of the journal, based on total(...)

If it feels like stocks have been hanging near their highs for a long time without being able to break out, you aren’t imagining things. By one measure, stocks have never traded so close to their highs for this long without breaking out, at least based on the Nasdaq Composite. Specifically, the(...)

Over the past weeks I have been weighing up trading strategies. I have identified two major issues which people always overlook. Firstly, performance consistency. Averaged results over long periods of time often paper over long periods of poor performance. Researchers report max drawdown, but I(...)

Facts and Fantasies About Commodity Futures Ten Years Later Gorton and Rouwenhorst (2006) examined commodity futures returns over the period July 1959 to December 2004 based on an equally-weighted index. They found that fully collateralized commodity futures had historically offered the same return(...)

The R/Finance 2015 Conference wrapped up last Saturday at UIC. It has been seven years already, but R/Finance still has the magic! - mostly very high quality presentations and the opportunity to interact and talk shop with some of the most accomplished R developers, financial modelers and even a(...)

An Actual (Theoretical) Approach to Trading KO So let’s assume two traders took the following approaches to trading KO starting on 12/31/1981, each with $1,000: *Trader A bought $1,000 worth of KO stock and held it through 6/2/2015. *Trader B bought and held KO stock twice a year, during the two(...)

Global breadth weakening $SPY

Superstatistical Fluctuations in Time Series of Leverage Returns