Recent research shows that B/M is losing explanatory power (Asness et al. 2015, Fama-French 2015, Hou et al. 2015). Some have theorized that the decrease in effectiveness in B/M is due to the increasingly large value of intangible assets. Forty years ago the market was dominated by Kodak, General

We all know that the more indebted a company is, the greater the risk of bankruptcy. But what is really the best way to measure this indebtedness? In this post we will compare two of the best known leverage ratios: Debt/Equity (Debt-to-Equity) and Net Debt/EBITDA (Net Debt-to-EBITDA). Leverage

An innovative company has launched two ETFs to captures the night effect - the difference between stock market returns during the trading day, and when the market is closed. It is a well-documented effect that most of the market gains come overnight returns, and that day returns are relatively flat.

Christoph Reschenhofer contributes to the factor-based investment literature with his April 2022 paper, “Combining Factors,” in which he investigated the performance of multifactor portfolios formed via a combination of stock characteristics scores. He began by noting that while “the finance

Stochastic processes play a key role in modelling the behavior over time of many financial assets. These mathematical descriptions of reality help making investment decisions. They can be used to price stock market options, make Monte Carlo simulations or define probabilities of expected returns,

Value is the clear winner of YTD 2022 Value, Momentum, and Low Volatility factors were positively correlated, which changed to previous years The Quality factor performed worst, which can be explained by a bias towards tech stocks INTRODUCTION We present the performance of five well-known factors on

Asset managers are often fixated on predicting the best performing asset in the near future – be that a month ahead, six months, a year or two. Of course, it would be great to know what will appreciate in price the most (and subsequently – what to invest in right now), but all we can do is

Regular listeners to the podcast I ocasionally co-host will know that I enjoy some light hearted banter with some of my fellow podcasters, many of whom describe themselves as 'pure' trend followers, whilst I am an apostate who deserves to be cast into the outer darkness. My (main) sin? The

I was browsing LinkedIn the other day and saw a bar chart of annual average VIX levels, and noticed that they kind of go up and down as if it was a cycle. Intra-day effects of elevated volatility near open and close are well-known, as well as some day-of-week patterns. Seasonal effects of VIX are

If 2022 has taught us anything, it is that our understanding of the inflationary process is woefully incomplete. Increasingly, it seems that the easy money era of the 2010’s created a blind spot in the market: stable inflation and ample liquidity were taken for granted. The risk of high (indeed,

Most defensive and diversifying strategies generated negative returns in YTD 2022 The correlation of almost all of these strategies to equities was too high Only managed futures generated attractive diversification benefits INTRODUCTION Economics and investing are all about data, eg GDP has

A lot of people ask me how I invest my own money, and I am always happy to oblige. But I have never discussed the topic in the public (unlike my friend Meb, who has a great post dedicated to the subject). However, this past week Justin and Jack asked if they could grill me on my personal portfolio

Broad macroeconomic trends, such as inflation, economic growth, and credit creation are critical factors of shifts in monetary policy. Above-target trends support monetary tightening. Below-target dynamics give grounds for monetary easing. Yet, markets may not fully anticipate policy shifts that

The AllocateSmartly website often has interesting posts. Recently I was reading the article Trending Fast and Slow and thought about other ideas to test. The article is based on research on trading the SPX and depending on the current historical volatility one would either use a 12-month or a

Ron Kaniel, Zihan Lin, Markus Pelger, and Stijn Van Nieuwerburgh contribute to the asset pricing literature with their January 2022 study “Machine-Learning the Skill of Mutual Fund Managers” in which they used machine learning in the form of an artificial neural network to examine the universe

Can the returns from running factor strategies be enhanced if institutional investors selectively and actively participate? Most of the evidence presented in this paper would suggest the answer is an unqualified YES. The authors argue this would require institutional investors to possess and then

In order to develop complex strategies for a successful asset allocation, portfolio managers need profound knowledge on the field. Apparently, this is the key to be able to consistently beat the market. In this post we will learn how to design investment strategy based in Modern Portfolio Theory in

A recent spring 2022 crisis in the cryptocurrency market emphasized the importance of market-neutral crypto trading strategies. It’s not enough just to HODL crypto market and hope for the everlasting bull market. Therefore, we continue our series of research articles about the cryptocurrency

Most investors treat factor and macro variables differently Including macro variables improves a factor exposure analysis Both should be considered simultaneously when analyzing investment portfolios INTRODUCTION The investment world is full of conundrums. For example, discussions on investment

This post focuses on the costs and benefits of including generic broad-based emerging market exposures in one’s portfolio (Note, we do not discuss factors/freedom/etc.). The analysis is not meant to be exhaustive and/or highly complex. Nor is it meant to sway the reader in one direction or the

This is a test of the paper Predicting Bond Returns: 70 Years of International Evidence. The authors use an ensemble model to trade US and international treasury bonds. Over the last 60+ years the strategy would have produced long-term returns in line with buy & hold, while significantly

In a blog post a few years ago I showed that the Fed Day edge has basically played out before the announcement even takes place. Returns after the announcement have been somewhat random. In last night’s subscriber letter I decided to take a similar look, but only examining instances during

In the financial field, managers usually take advantage of the great development in machine learning techniques to improve their models and get the best performance of their portfolios. These techniques may be clustering, neural networks, or even a more traditional one as optimization algorithms. In

By the middle of 2019, we had been running an ensemble of relative sentiment(1) indicators in live asset management for several years. One of the components of that ensemble was a strategy that looked at Sentix sentiment indices. For those unfamiliar with Sentix (a German company), every week it

Cryptocurrency investing is a widely debated topic and one can find plenty of debates on Twitter discussing the fed, fiat currencies, and inflation. Regardless of where you fall on the crypto spectrum, we try and focus on research-centric takes on various investment themes whenever possible. The

This is a quick follow-up to my previous post with comments on Artur Sepps's video. From the start Mr Sepp sets up the practical problem familiar to anyone in the crypto options space. The leader is Deribit - an exchange that I wrote about extensively in this blog with ~ 89% market share. The

A few years back I wrote about Zweig Breadth Thrusts in some detail. The Zweig Thrust takes a 10-day exponential moving average of the NYSE Up Issues %. It looks for a move from Over the last 3 days we have essentially what could be considered the inverse setup trigger. The NYSE Up Issues % 10ema

Price charts normally display price over time. Or in some special cases price over ranges or momentum. In his TASC articles in June and July 2022, John Ehlers proposed a different way of charting. The ratio of two parameters, like price over momentum, or price A over price B, is displayed as a 2D

Investors tend to talk more about sector than factor performance However, few investors conduct a regression-based sector exposure analysis The high correlations of sectors, even if structured market-neutral, makes this less meaningful INTRODUCTION Switch on CNBC or Bloomberg TV during US stock

Asset return volatility is typically calculated as (annualized) standard deviation of returns over a sequence of periods, usually daily from close to close. However, this is neither the only nor necessarily the best method. For exchange-traded contracts, such as equity indices, one can use open,

When someone mentions a financial crisis, most people immediately think of the global financial crisis of 2007-2008. Even though this is the most significant economic crisis in recent years, there have been many more significant crisis periods in the past 100 years. This article examines the biggest

Since the 1992 publication of “The Cross-Section of Expected Stock Returns” by Eugene Fama and Kenneth French factor-based strategies and products have become an integral part of the global asset management landscape. While “top-down” allocation to factor premiums (such as size, value,

Inflation as the Source of the Bond, Equity, and Value Premia Martin Tarlie (GMO) May 2022 A no-arbitrage pricing model with inflation as the only priced risk factor explains the bond, equity, and value premia observed in the United States over the past sixty years. Even though inflation is the only

Value trading strategies have come back into spotlight in recent years. After lackluster performance in years 2018, 2019, 2020, Value has staged a strong comeback in 2021 and also in 2022. With a long history of systematic equity Value strategies, many different variants of the strategy have

Market commentators sometimes suggest that the equity ETF market is just a bunch of “index funds” that all do essentially the same thing: deliver undifferentiated stock market exposure. How true is that statement? Fortunately, we can test the hypothesis that the ETF market is roughly a few

In a previous post, I introduced near efficient portfolios, which are portfolios equivalent to mean-variance efficient portfolios in terms of risk-return but more diversified in terms of asset weights. Such near efficient portfolios might be used to moderate the tendency of efficient portfolios to

About half of Robeco’s Quantitative Investing team recently published a short paper on monthly trading strategies (see Blitz et everybody Beyond Fama-French Factors: Alpha from Short-Term Signals Frequencies). I can imagine these guys talking about this stuff all the time, and someone finally

Traditional asset pricing theory holds that the workings of information networks among investors are good descriptors of equity markets. Investors that are “better informed” about fundamentals and who trade earlier than less well informed investors will receive higher returns. As the” better

Factor exposure analysis can be used in fixed income as easily as in equities More variables improve the explanatory power of the model However, it also can make the interpretation challenging INTRODUCTION Running a factor exposure analysis is a core element of the due diligence process for

Momentum, the tendency of past winner stocks to outperform past loser stocks over the next several months, is one of the most well-documented and well-researched asset pricing anomalies. In the asset pricing literature, momentum is generally defined over the short-, medium- and long-term in the

In this article we will be introducting Tiingo, a data and stock market tools provider. Founded in 2014 Tiingo aims to empower its users by providing good, clean and more accurate data. They offer OHLCV data for 82,468 Global Securities, 37,319 US & Chinese Stocks 45,149 ETFs & Mutual Funds.

Not long ago, GameStop stock rose like crazy in only a few hours with the effects of broker-dealer options hedging spurred by retail investor buying pressure. And from February to March 2020, options trading activity was also pointed to as a contributor to stock swings in the Covid-19 selloff. The

This is a test of a tactical strategy from the paper Trending Fast and Slow. It trades the S&P 500 by switching between fast and slow momentum based on market volatility. The strategy would have kept pace with the S&P 500, while significantly reducing the worst drawdowns. Backtested results

Some sources of financial data can be expensive or difficult to find. For example, some is only available from exchanges or vendors who charge a hefty fee for access. However, the financial industry is also heavily regulated, and one of its main regulators provides free access to its data. The (U.S.

The Monte Carlo method (Monte Carlo simulations) is a class of algorithms that rely on a repeated random sampling to obtain various scenario results. Monte Carlo simulations are used to predict the probability of different outcomes when it would be difficult to use other approaches such as

Duration volatility risk premium means compensation for bearing return volatility risk of an interest rate swap (IRS) contract. It is the scaled difference between swaption-implied and realized volatility of swap rates’ changes. Historically, these premia have been stationary around positive

Most technological change today is an evolution rather than a revolution. Naturally, it is great to have a mobile device that allows instant access to the global knowledge depository, entertainment, shopping, and so on, but most of these innovations have been predicted decades ago by science fiction

Trend-following strategies have gained extreme popularity in the recent decade. Almost every asset manager utilizes trend following, or momentum, in some form – whether consciously or subconsciously. We at Quantpedia are convinced that each and every strategy has to be scrutinized thoroughly

Investors care about more than just returns. They also care about risk. Thus, prudent investors include consideration of strategies that can provide at least some protection against adverse events that lead to left tail risk (portfolios crashing). The cost of that protection (the impact on expected

Finding a high-quality data source is crucial for quantitative trading strategies. Also, having a long history is beneficial. Fama & French, for example, offer free historical data for stocks and a variety of factors. However, it is very hard to get good-quality and free data for other asset