Quant Mashup
Constructing Long-Only Multifactor Strategies: Portfolio Blending vs. Signal Blending [Alpha Architect]
The heightened interest in factor investing has been accompanied by a corresponding focus on the nuts and bolts of constructing multifactor portfolios. There are essentially two ways to go: In a one-step process, single factor signals are blended into a composite signal and one multifactor portfolio
- 4 weeks ago, 22 Oct 2018, 04:50pm -
A Bull Bear Background Plotting Function for Octave [Dekalog Blog]
As part of my recent research I have found it convenient to write another custom plotting function for Octave, which plots a single line price plot against a conditionally coloured background, e.g. two separate colours for bull and bear market regimes. Being able to plot like this avoids the
- 1 month ago, 20 Oct 2018, 04:37am -
Weekly Recap: ETF Tax Efficiency, Profitability Factor, Trend Following [Alpha Architect]
This week Ryan and I have a discussion on three topics. First, we discuss ETF tax efficiency based on the findings in a new paper by the RAFI team. Second, we discuss the profitability factor as Larry Swedroe highlights a new paper on international evidence. Third, we discuss my article on how one
- 1 month ago, 20 Oct 2018, 04:37am -
Scaling/ normalisation/ standardisation: a pervasive question [Quant Dare]
One of the most asked questions when dealing with several features is how you can summarise or transform them to similar scales. As you probably know, many Machine Learning algorithms demand the input features being in similar scales. But, what if they aren’t? Can we just work with raw data in the
- 1 month ago, 18 Oct 2018, 03:04pm -
The Profitability Factor: International Evidence [Alpha Architect]
Robert Novy-Marx’s 2013 paper “The Other Side of Value: The Gross Profitability Premium” not only provided investors with new insights into the cross-section of stock returns, but also helped further explain some of Warren Buffett’s superior performance. (Wes Gray summarized that paper
- 1 month ago, 18 Oct 2018, 03:04pm -
Backtesting a Dividend Strategy [Alvarez Quant Trading]
I was recently at a NWTTA presentation about the “S&P 500 Dividend Aristocrats” and how to trade these stocks. The strategy was part quantitative and part discretionary. It was popular talk with lots of good questions. People always seem interested in dividend stocks but for me they are just
- 1 month ago, 17 Oct 2018, 02:19pm -
Generation AI - The New Data-Driven Investor: Event takeaways, slides & videos [Raven Pack]
Close to 1,000 finance professionals registered to attend the event, an increase of nearly 50% from last year’s event. Surely, artificial intelligence and big data continues to grab the attention of the investment industry. The event took place on September 12, 2018 at the Convene Center by Times
- 1 month ago, 16 Oct 2018, 02:30pm -
What is the correct benchmark for trend following? [Alpha Architect]
“What is the correct benchmark for trend following?” This is a difficult question, and there really is no perfect answer. As many of our readers know, we are fans of trend following and trend-followed portfolios. For those unfamiliar with trend following, the idea is rather simple–invest in an
- 1 month ago, 16 Oct 2018, 02:29pm -
Extended Backtest of Global Equities Momentum [Dual Momentum]
In 2013, I created my Global Equities Momentum (GEM) model that applied dual momentum to stock and bond indices. We hold U.S. or non-U.S. stock indices when stocks are strong. Bonds are a safe harbor when stocks are weak. When my book was published in 2014, I had Barclays bond index data back to
- 1 month ago, 16 Oct 2018, 02:29pm -
A Carry-Trend-Hedge Approach to Duration Timing [Flirting with Models]
In this paper we discuss simple rules for timing exposure to 10-year U.S. Treasuries. We explore signals based upon the slope of the yield curve (“carry”), prior returns (“trend”), and prior equity returns (“hedge”). We implement long/short implementations of each strategy covering the
- 1 month ago, 15 Oct 2018, 02:14pm -
Improving the Odds of Value [Factor Research]
Value investors earn a premium for holding undesirable stocks Market skewness may identify periods where the premium is more attractive The returns from the Value factor since 1926 were zero when market skewness was negative INTRODUCTION Although buying cheap stocks is intuitively appealing, holding
- 1 month ago, 15 Oct 2018, 02:14pm -
Price Movement Prediction [Eran Raviv]
Just finished reading the paper Stock Market’s Price Movement Prediction With LSTM Neural Networks. The abstract attractively reads: “The results that were obtained are promising, getting up to an average of 55.9% of accuracy when predicting if the price of a particular stock is going to go up
- 1 month ago, 15 Oct 2018, 02:09am -
Reversal Patterns: Part 2 | Trading Strategy (Exits) [Oxford Capital]
Developer: Richard Wyckoff; Toby Crabel; Gerald Appel. Source: Crabel, T. (1990). Day Trading with Short Term Price Patterns and Opening Range Breakout. Greenville: Traders Press, Inc.; Appel, G. (2005). Technical Analysis. NJ: Pearson Education, Inc. Concept: Trading strategy based on reversal
- 1 month ago, 15 Oct 2018, 02:09am -
A Look At How Fridays Create The Most Reliable Bounces [Quantifiable Edges]
Friday is generally not terribly reliable in being a day where the market bounces from a low. It is one of the least popular days for this to occur (along with Wednesday). But a potential positive about a Friday bounce is that when they do occur, they tend to be the most reliable moving forward. The
- 1 month ago, 15 Oct 2018, 02:08am -
The predictability of market-wide earnings revisions [SR SV]
Forward earnings yields are a key metric for the valuation of an equity market. Helpfully, I/B/E/S and DataStream publish forward earnings forecasts of analysts on a market-wide index basis. Unfortunately, updates of these data are delayed by multiple lags. This can make them inaccurate and
- 1 month ago, 13 Oct 2018, 05:15am -
Conference: AI and Data Science in Trading, NYC March 2019
There is so much hype and confusion surrounding AI and alt data at the moment. The AI & Data Science in Trading conference separates the hype from the reality” Professor David Hand, Imperial College, London Finding alpha has always required asset managers to ‘raise the bar’ in terms of
- 1 month ago, 12 Oct 2018, 02:57pm -
Back to Back 50-day Lows and Extremely Low RSI(2) Readings [Quantifiable Edges]
Strongly oversold markets often contain a short-term upside edge. Of course oversold can always become more oversold. Wednesday took the SPX down to a 50-day closing low. Additionally, many short-term price oscillators, like the RSI(2) showed extremely low readings. Further selling on Thursday meant
- 1 month ago, 12 Oct 2018, 02:56pm -
Swimming Against the Current [Alpha Scientist]
Several weeks back, I posted some work I had done on ETF fund flows and what they could tell us about how investors, on average, fare with respect to timing their entries and exits. TL;DR: Most investors are terrible at timing inflows and outflows to the market. They badly trail benchmarks because
- 1 month ago, 12 Oct 2018, 03:38am -
Consistent Momentum with Regime Filters [Sutherland Research]
In this post we’re going to continue our work with the Consistent Momentum strategy that we explored here. Initial investigation of the strategy (kindly provided by the good folk at Quantpedia) proved to be relatively good, with a CAGR of +19% and a single losing year through the test period. One
- 1 month ago, 12 Oct 2018, 02:22am -
How a Multi-factor Portfolio is Constructed Matters [Alpha Architect]
The CAPM was the first formal asset-pricing model. Market beta was its sole factor. With the 1992 publication of their paper, “The Cross-Section of Expected Stock Returns,” Eugene Fama and Kenneth French introduced a new-and-improved three-factor model, adding size and value to market beta as
- 1 month ago, 11 Oct 2018, 04:18pm -
"Black Swan" Data Cleaning [Dekalog Blog]
Since my last post I have been investigating training features that can be derived from my Currency Strength indicator as input for machine learning algorithms and during this work it was obvious that there are instances in the raw data that are Black Swan outliers. This can be seen in the chart
- 1 month ago, 11 Oct 2018, 04:18pm -
Cointegration Breakdown [Jonathan Kinlay]
One of the perennial difficulties in developing statistical arbitrage strategies is the lack of reliable methods of estimating a stationary portfolio comprising two or more securities. In a prior post (below) I discussed at some length one of the primary reasons for this, i.e. the lower power of
- 1 month ago, 10 Oct 2018, 04:00pm -
Managing Equity Risk When Rates Rise [Flirting with Models]
Last week was a good reminder that there is no ironclad law that rates and equities can’t sell-off at the same time. Strategic diversification with bonds is akin to an uncertain insurance policy whose price and ultimate payoff in the event of a market crash is highly dependent on the level and
- 1 month ago, 9 Oct 2018, 04:57pm -
Test of Equality Between Two Densities [Eran Raviv]
Are returns this year actually different than what can be expected from a typical year? Is the variance actually different than what can be expected from a typical year? Those are fairly light, easy to answer questions. We can use tests for equality of means or equality of variances. But how about
- 1 month ago, 9 Oct 2018, 04:56pm -
Fixed Income Factors: An Overlooked Corner of the Market [Alpha Architect]
Factors, or “style” investing, seems to be all the rage these days, including the use of factors in fixed income (here, here and here are good places to start). However, many of these strategies focus on CUSIP level bond selection. This means executing a strategy with a fair amount of turnover
- 1 month ago, 9 Oct 2018, 04:56pm -
Bonus Episode: Wes Gray – Factor Investing is More Art, and Less Science [Meb Faber]
Author: Wes Gray. Wes is the CEO/CIO of Alpha Architect. He has published multiple academic papers and four books, including Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). After serving as a Captain in the United States Marine Corps,
- 1 month ago, 8 Oct 2018, 04:41pm -
Factor Investing in Micro & Small Caps [Factor Research]
This research note was originally published by the CFA Institute’s Enterprising Investor blog. Here is the link. SUMMARY Micro caps are commonly perceived as highly risky, but potentially also highly rewarding Smalls caps generate more attractive risk-return ratios than micro caps on index level
- 1 month ago, 8 Oct 2018, 04:40pm -
Investment Factor Timing: Challenging, but Not Impossible [Alpha Architect]
Is it possible to time factors? (An old blog on the topic here and Jack discussing on a podcast here) Are there financial and economic indicators that can be used to predict factor returns? Are timing models just luck? What are the Academic Insights? YES. The authors use Fama-French 5 Factors
- 1 month ago, 8 Oct 2018, 04:40pm -
Multiple risk-free interest rates [SR SV]
Financial markets produce more than one risk-free interest rate. This is because there are several separate market segments where structured trades replicate such a rate. Differences in remuneration arise for two reasons. First, financial frictions can prevent arbitrage. Second, some risk-free
- 1 month ago, 6 Oct 2018, 05:50am -
Trend Following in September [Wisdom Trading]
September 2018 Trend Following: DOWN -1.41% / YTD: -8.85% Please find this month’s report of the Wisdom State of Trend Following. Performance is hypothetical. Chart for September: Wisdom State of Trend Following - September 2018 And the 12-month chart:
- 1 month ago, 6 Oct 2018, 05:50am -
Summing up the Potential Benefits and Pitfalls of Diversification in 3 Slides [Alpha Architect]
Not long ago I used to teach investment management courses to Master’s students (MBAs and MS Finance types). A core aspect of my course was so-called modern portfolio theory. We did a lot of math and problem-sets to make it feel like we were doing something useful. But I can summarize the core
- 1 month ago, 4 Oct 2018, 02:16pm -
How can the Investment CAPM Price Momentum? [Alpha Architect]
“How can a q-theoretic model price momentum?” is a new paper by Robert Novy-Marx and goes right to the heart of an intense debate ongoing in empirical asset pricing — can neoclassic economic models explain the so-called momentum anomaly? A quote from the start of the paper, which answers the
- 1 month ago, 4 Oct 2018, 02:15pm -
Asset Allocation Roundup [Allocate Smartly]
Recent asset allocation articles (tactical or otherwise) that you might have missed: Market Timing the Credit Cycle (EconomPic) Jake looks at forward returns based on the width and direction of the credit “quality spread” (high yield minus investment grade OAS). Below we’ve reproduce Jake’s
- 1 month ago, 3 Oct 2018, 08:35am -
Erratic correlation: an illustration through Chord diagrams [Quant Dare]
Let’s start with a simple question: what is the first thing to think about when you create a portfolio? I’m sure several ideas spring to mind, but let’s go to the heart of the matter: what is the relationship between the assets in a portfolio? That is one of the greatest managers’ concerns.
- 1 month ago, 3 Oct 2018, 08:34am -
Conference: Financial Revolution - Sentiment Analysis, AI and Machine Learning - Oct 30, 2018, Zurich
Artificial Intelligence is deemed to be the main driver of the 4th Industrial Revolution. IDC predicts that investment in AI will grow from $12bn in 2017 to $57.6 by 2021, while Deloitte Global predicts the number of machine learning pilots and implementations will double in 2018 compared to 2017.
- 1 month ago, 2 Oct 2018, 10:03am -
When Diversification Fails [Alpha Architect]
The paper investigates the following research question: Are left-tail vs. right-tail correlations symmetric for the majority of risky assets (including size and styles)? Is left-tail vs. right-tail correlations between stocks and hedge funds styles symmetric? Is left-tail vs. right-tail correlations
- 1 month ago, 2 Oct 2018, 10:00am -
Measuring Risk Tolerance [Flirting with Models]
Risk tolerance, capacity, and need all factor into determining whether a portfolio is appropriate for an investor. Capacity and need are generally straightforward to quantify and map to an appropriate portfolio, but risk tolerance is more difficult, with many questionnaires potentially
- 1 month ago, 1 Oct 2018, 10:46am -
Factor Olympics Q3 2018 [Factor Research]
Global factor performance in the first three quarters of 2018 is comparable to 2017 However, regional factor performance diverges, reflecting changes in monetary and trade policies Low Volatility leads and Value lags INTRODUCTION We present the performance of seven well-known factors on an annual
- 1 month ago, 1 Oct 2018, 10:46am -
Tactical Asset Allocation in September [Allocate Smartly]
This is a summary of the recent performance of a wide range of excellent tactical asset allocation strategies, net of transaction costs. These strategies are sourced from books, academic papers, and other publications. While we don’t (yet) include every published TAA model, these strategies are
- 1 month ago, 30 Sep 2018, 11:59am -
How lazy trading explains FX market puzzles [SR SV]
Not all market participants respond to changing conditions instantaneously, not even in the FX market. Private investors in particular can take a long while to adapt to changes in global interest rate conditions and even institutional investors may be constrained by rules and lengthy process. A
- 1 month ago, 30 Sep 2018, 11:59am -
Bitcoin Seasonality: Fooled by Randomness [Quant Fiction]
Autumn is my favorite time of year. Football (and more importantly as a Bills fan, fantasy football) is back, everything tastes like pumpkin, and I don’t get sweaty walking around outside. It’s also the start of the cryptocurrency bull season! Or is it? Let’s find out. It’s already started:
- 1 month ago, 28 Sep 2018, 10:44am -
Value at Risk or Expected Shortfall [Quant Dare]
Value at Risk and Expected Shortfall are related to the risk taken by a portfolio but… Which one is the best? Let’s learn together the differences between these two measures. Risk measures Coherence is really important when defining a risk measurement. If the measure is not coherent, it will not
- 1 month ago, 28 Sep 2018, 10:44am -
Value and Momentum and Risk [Alpha Architect]
Early in the summer, I was on a podcast with Corey Hoffstein discussing momentum investing. During the discussion, Corey asked me a question regarding risk versus mispricing, specific to the momentum anomaly. We frequently cite the behavioral explanation for momentum–investors tend to underreact
- 1 month ago, 25 Sep 2018, 09:48pm -
Portfolio Optimization and the Sharpe Multiplier [Invest ReSolve]
We’ve spent a great deal of time in past articles discussing the merits of portfolio optimization. In this article we will examine the merits and challenges of portfolio optimization in the context of one of the most challenging investment universes: Managed Futures. Futures exhibit several
- 1 month ago, 25 Sep 2018, 09:00am -
Decomposing Trend Equity [Flirting with Models]
We introduce the simple arithmetic of portfolio construction where a strategy can be broken into a strategic allocation and a self-financing trading strategy. For long/flat trend equity strategies, we introduce two potential decompositions. The first implementation is similar to equity exposure with
- 1 month ago, 24 Sep 2018, 12:08pm -
Liquid Alternatives: Alternative Enough? [Factor Research]
Liquid alternatives offer hedge fund strategies in mutual fund format The correlations to the S&P 500 have been high, even of market neutral funds Diversification benefits have therefore been limited DISRUPTING THE HEDGE FUND INDUSTRY Liquid alternatives have been heralded as hedge funds for
- 1 month ago, 24 Sep 2018, 12:08pm -
Listening to the Short Sellers [Alpha Scientist]
To most investors, short selling is a shadowy, mysterious corner of the markets. Many do not make use of shorting - and I suspect a majority don't understand how to glean insights from trends in short selling activity. Over the past several years, I've traded short about as often as long
- 1 month ago, 22 Sep 2018, 09:13pm -
A brief history of quantitative equity strategies [SR SV]
Understanding quantitative equity investments means understanding a significant portion of market positions. Motivated by the apparent failure of the capital asset pricing model and the efficient market hypothesis, a large share of equity investors follows stylized “factors” that are expected to
- 1 month ago, 22 Sep 2018, 06:20am -
Research Review | 21 September 2018 | Volatility [Capital Spectator]
Hedging With Volatility Mario Alagoa (Sacred Heart University) May 9, 2018 A risk-averse investor with a long equity position is presumably interested in identifying a hedging strategy that protects the value of that investment. The common approach encompasses using either financial derivatives or
- 1 month ago, 21 Sep 2018, 07:59pm -
Video Digest: A Trend Equity Primer [Flirting with Models]
- 1 month ago, 21 Sep 2018, 07:59pm -
