Our research will explore the intriguing phenomenon of the Pre-Holiday effect in commodities, particularly crude oil and gasoline. Historical data reveals a short-term price drift prior to major U.S. holidays, suggesting a trend in these markets. We hypothesize that this anomaly may be driven by

In the initial post of the series on volatility forecasting, I described the simple and the exponentially weighted moving average forecasting models, that are both easy to understand and relatively performant in practice. Beyond (univariate) volatility forecasting, these two models are also widely

A weaker-than-expected July jobs report, with the unemployment rate increasing to 4.3%, officially triggered the Sahm Rule, causing investors to worry that the Federal Reserve may be behind the curve in cutting interest rates to prevent a recession. (The August report showed an increase in payroll

In this article, we explore the historical performance of sector momentum strategies and examine how their alpha has diminished over time. By analyzing the underlying causes behind this decline, we identify key factors contributing to the underperformance. Most importantly, we introduce an enhanced

This year I launched a strategy subscription service for a long-only ETF strategy developed in house. I learned a lot through this process but I made several mistakes that pushed me to learn new skills and improve the product offering. In this series I will discuss my initial mistakes, and how

What are the Research Questions? The research questions are as follows: How can textual analysis of business news, specifically The Wall Street Journal (WSJ), be used to measure the state of the economy? What is the structure of news coverage related to economic events, and how do these topics

As the annual SPIVA studies demonstrate, index funds persistently outperform the vast majority of actively managed funds, even before considering taxes. With that said, most investors are unaware that there are weaknesses of index funds that result from their strategy to replicate the return of an

"Mathematical reasoning may be regarded rather schematically as the exercise of a combination of two facilities, which we may call intuition and ingenuity.” Alan Turing. It's hard to find anyone in Computer Science who doesn't hold Alan Turing in deep admiration. Widely regarded as

Recently on QuantStart we wrote a tutorial article that discussed the mean-reverting Ornstein-Uhlenbeck process, outlining some of its applications as well as providing some Python snippets to generate sample paths. In this article we are going to introduce the Vasicek Model, which is example of a

The annual SPIVA has documented that retail mutual funds underperform with great persistence, with any persistence of outperformance not significantly greater than would be randomly expected. The large body of research on the failure of active management led Charles Ellis to famously call it a

Today we spoke with Corey Hoffstein, a well-known market practitioner with a deep and broad knowledge across quantitative trading & trend following, but also across developing investment products for wider advisor distribution. I’m super interested in almost every aspect of the financial

You are most likely familiar with the idea of calculating averages with an exponential weighting. The idea is that you have a higher weight to more recent information. The weights for an exponentially weighted average look like: for . And the exponentially weighted average of a series looks like:

Some time ago on QuantStart we wrote an article on generating Brownian Motion paths for simulating stock price assets. In this tutorial article we are going to consider a more advanced stochastic process model known as the Ornstein-Uhlenbeck (OU) process that can be used to model time series that

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,”

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

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

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 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

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,

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

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

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

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.

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.

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

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

"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

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

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

"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

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

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

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,

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

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,

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

“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

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,

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

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

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

"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

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

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

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

"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

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

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 -

"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

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