Quant Mashup
Sixty-Forty Over the Long-Run [Two Centuries Investments]
Based on many years of reviewing investor portfolios, I concluded that most end up closely resembling a 60% Stocks / 40% Bonds Allocation. Yes, many portfolios also have alternatives, nuanced sub-asset classes, individual security selection, and perhaps some tactical components. But when you look at
- 1 month ago, 13 Jul 2020, 09:05pm -
Reducing Estimation Error in Mean-Variance Optimization [Alpha Architect]
As a general rule, we recommend you kick your spidey senses into high gear anytime there is a geek bearing formulas (especially if they are trying to sell you something). Simple is always a nice cheap default because complexity often leads to confusion, which leans to a need to have an expert, which
- 1 month ago, 13 Jul 2020, 09:04pm -
Cap-Weighted Benchmarks: Good Momentum Bets? [Factor Research]
After strong momentum rallies, investors frequently ask if cap-weighted benchmarks are good Momentum bets Factor exposure analysis shows this is not the case Investors should seek smart beta and long-short products if they want Momentum exposure INTRODUCTION Old myths are hard to kill. Good old
- 1 month ago, 13 Jul 2020, 09:04pm -
Portfolio Optimisation with MlFinLab: Theory-Implied Correlation Matrix [Hudson and Thames]
Traditionally, correlation matrices have always played a large role in finance. They have been used in tasks ranging from portfolio management to risk management and are calculated based on historical empirical observations. Although they are used so frequently, these correlation matrices often have
- 1 month ago, 13 Jul 2020, 11:01am -
Labeling Momentum & Trends [Tr8dr]
There are times when need to label a time series, identifying periods of momentum, trend, mean-reversion, etc. Directionaly labeling timeseries has a wide variety of applications: labels can be used for supervised learning analysis of microstructure around larger price moves conditional analysis
- 1 month ago, 12 Jul 2020, 08:04pm -
Testing expectations [OSM]
In our last post, we analyzed the performance of our portfolio, built using the historical average method to set return expectations. We calculated return and risk contributions and examined changes in allocation weights due to asset performance. We briefly considered whether such changes warranted
- 1 month ago, 10 Jul 2020, 12:41pm -
March for the Fallen 2020: Sign-Up for The Virtual Version! [Alpha Architect]
We are going to help make March for the Fallen a virtual event this year (September 26, 2020 at 8am). COVID is bad news, but we can turn lemons into lemonade…and we can still show gratitude for Gold Star Families by breaking into smaller groups and marching outdoors! We’ve already have 20 local
- 1 month ago, 9 Jul 2020, 09:37am -
SPX Golden Cross History Since 1928 [Quantifiable Edges]
SPX will post a Golden Cross on Thursday afternoon. A Golden Cross occurs when the 50ma crosses over the 200ma. Having the 50ma above the 200ma is commonly considered a bullish market condition – and generally it is. In the 4/2/19 blog post I looked at SPX Golden Crosses dating all the way back to
- 1 month ago, 9 Jul 2020, 09:36am -
Gold Price Prediction Using Machine Learning In Python [Quant Insti]
Is it possible to predict where the Gold price is headed? Yes, let’s use machine learning regression techniques to predict the price of one of the most important precious metal, the Gold. Machine Learning in Trading We will create a machine learning linear regression model that takes information
- 1 month ago, 8 Jul 2020, 10:09am -
Market Return Around the Clock [Alpha Architect]
Get your popcorn ready, the quants are about to do battle… As with all good questions in academic research, there are two sides to the story. We recently published Matthew Bartolini’s blog post explaining the impacts of trading costs on the “Overnight Return Anomaly.” This paper, takes the
- 1 month ago, 7 Jul 2020, 01:57pm -
The Livermore System: Part 2 | Trading Strategy (Filters) [Oxford Capital]
Source: Kaufman, P. J. (2020). Trading Systems and Methods (Chapter 5: The Livermore System). New Jersey: John Wiley & Sons, Inc. Concept: Trading strategy based on Jesse Livermore‘s approach to swing trading with DeMark pivots. Research Goal: Performance verification of Pivot Size and
- 1 month ago, 7 Jul 2020, 01:57pm -
Beyond Risk Parity: The Hierarchical Equal Risk Contribution Algorithm [Hudson and Thames]
As diversification is the only free lunch in finance, the Hierarchical Equal Risk Contribution Portfolio (HERC) aims at diversifying capital allocation and risk allocation. Briefly, the principle is to retain the correlations that really matter and once the assets are hierarchically clustered, a
- 1 month ago, 6 Jul 2020, 09:34am -
Heads I Win, Tails I Hedge [Flirting with Models]
For hedging strategies, there is often a trade-off between degree, certainty, and cost. Put options have high certainty and typically offer a high degree of protection, making them costly to hold and roll over the long run. In this note, we briefly explore the application of different tactical
- 1 month ago, 6 Jul 2020, 09:33am -
Factor Olympics 1H 2020 [Factor Research]
Momentum & Quality are leading the performance scoreboard in 1H 2020 Value & Size generated negative returns, like in recent years Low Volatility failed to preserve capital during the COVID-19 crisis INTRODUCTION We present the performance of five well-known factors on an annual basis for
- 1 month ago, 6 Jul 2020, 09:33am -
R + Python = Rython [Eran Raviv]
Enough! Enough with that pointless R versus Python debate. I find it almost as pointless as the Bayesian vs Frequentist “dispute”. I advocate here what I advocated there (“..don’t be a Bayesian, nor be a Frequenist, be opportunist“). Nowadays even marginally tedious computation is being
- 1 month ago, 5 Jul 2020, 11:14pm -
Do non binary forecasts work? [Investment Idiocy]
This is a post about forecasts in trading systems. A forecast is a calibrated expectation for future risk adjusted returns. In more layman like terms, it is a measure of how confident we are about a bullish (positive forecast) or bearish (negative forecast). Perhaps it is easiest to think about
- 1 month ago, 3 Jul 2020, 11:39am -
Combining Momentum with Long-Term Reversal [Alpha Architect]
Two of most documented anomalies in the asset pricing literature are the momentum effect and the long-term reversal effect. Momentum is typically defined as the last 12 months of returns excluding the most recent month (i.e., months 2–12) because it tends to show a reversal, which some have
- 1 month ago, 3 Jul 2020, 11:38am -
Research Review | 3 July 2020 | Business Cycle Analysis [Capital Spectator]
Forecasting Macroeconomic Risk in Real Time: Great and Covid-19 Recessions Roberto A. De Santis (European Central Bank) July 2020 We show that financial variables contribute to the forecast of GDP growth during the Great Recession, providing additional insights on both first and higher moments of
- 1 month ago, 3 Jul 2020, 11:38am -
First Day of Month Based on Month [Quantifiable Edges]
Since the late 80s there has been a tendency for the market to rally on the first day of the month. One theory on why this occurs is that there are often 401k inflows that are put to work on the 1st of the month. I examined this tendency and broke it down by month on the blog in 2013 and 2009. I
- 1 month ago, 1 Jul 2020, 10:09am -
Time Series Momentum: Theory and Evidence [Alpha Architect]
The profitability of trend-following strategies has been documented in a large number of empirical studies. The majority of these empirical studies find that these strategies are profitable in the long-run over periods ranging from 50 to 150 years. However, two issues of concern arise regarding the
- 1 month ago, 30 Jun 2020, 01:06pm -
How Trend Following Strategies Shape Return Distributions [Alpha Architect]
Crisis Alpha is on everyone’s mind right now, maybe due to a bit of recency bias, but regardless of the reason thinking of and preparing for “tail-risk” is best done before it’s needed. Trend following is one such strategy that is rooted in academic research and is an enticing way to manage
- 1 month ago, 29 Jun 2020, 01:10pm -
The Variance Risk Premium: What Premium? [Factor Research]
Harvesting the variance risk premium has a sound theoretical foundation However, actual investment products have generated poor returns Furthermore, they are correlated to equities, providing few diversification benefits INTRODUCTION Investing is akin to fighting in a never-ending war. There are
- 1 month ago, 29 Jun 2020, 01:10pm -
Diversifying Your Value Portfolio? Quality Works, but Have You Heard of Momentum? [Alpha Architect]
What if your portfolio was only based on one idea? Something like “stocks always go up” or “value always beats growth.” You may be learning a humbling lesson right now that Mr. Market has taught us over and over again (and learning it the painful way). In this post, we’ll examine various
- 1 month ago, 26 Jun 2020, 01:46pm -
Political market making [Cuemacro]
It is challenging to understand how to model external shocks when trading financial markets. However, in recent years, it has become particularly notable that these risks, such as Brexit, the election of Trump, or coronavirus can greatly impact markets. Hence, we need to have a way to model them. In
- 1 month ago, 26 Jun 2020, 04:57am -
Performance anxiety [OSM]
In our last post, we took a quick look at building a portfolio based on the historical averages method for setting return expectations. Beginning in 1987, we used the first five years of monthly return data to simulate a thousand possible portfolio weights, found the average weights that met our
- 1 month ago, 26 Jun 2020, 04:57am -
YTD Performance of Crisis Hedge Strategies [Quantpedia]
After a month, we are back with a year-to-date performance analysis of a few selected trading strategies. In the previous article, we were writing about the performance of equity factors during the coronavirus crisis. Several readers asked us to take a look also on different types of trading
- 1 month ago, 26 Jun 2020, 04:57am -
How to turn off a strategy using historical volatility [Alvarez Quant Trading]
A very common question I get, is “when should I turn off a strategy?” Given the very volatile markets we have had the last few months, I can relate. Some strategies can thrive in these high volatility markets. While others can suffer. In the June 2020 issue of Technical Analysis of Stocks and
- 1 month ago, 24 Jun 2020, 01:02pm -
Option-Based Trend Following [Flirting with Models]
The convex payoff profile of trend following strategies naturally lends itself to comparative analysis with option strategies. To isolate the two extremes of paying for whipsaw – either up front or in arrears – we replicate an option strategy that buys 1-month at-the-money calls and puts based
- 1 month ago, 23 Jun 2020, 02:40pm -
No Longer Superheroes? Twilight of the Bonds [Factor Research]
Bonds had superhero qualities over the last few decades The case for bonds in asset allocation is not clear when yields are low or negative Japan can be used as a roadmap for the outlook of a 60/40 portfolio in the US or Europe FIXED INCOME KRYPTONITE “Faster than a speeding bullet. More powerful
- 1 month ago, 23 Jun 2020, 02:40pm -
Can Statistics Actually Determine if Managers Have No Skill? [Alpha Architect]
Whether they are selecting a manager, a factor, or a strategy, investors can make two types of mistakes. We thought we were hiring Peter Lynch, not this loser! A Type I error (or false discovery) when selecting a manager who turns out to be unskilled. That Warren Buffett guy is washed up, let’s
- 1 month ago, 23 Jun 2020, 02:40pm -
Portfolio Optimisation with MlFinLab: Hierarchical Risk Parity [Hudson and Thames]
In 2016, Dr. Marcos Lopez de Prado introduced the Hierarchical Risk Parity (HRP) algorithm for portfolio optimization. Prior to this, Harry Markowitz’s Modern Portfolio Theory (MPT) was used as an industry-wide benchmark for portfolio optimization. MPT was an amazing accomplishment in the field of
- 1 month ago, 22 Jun 2020, 05:16am -
Petra on Programming: Truncated Indicators [Financial Hacker]
Cumulative indicators, such as the EMA or MACD, are affected not only by previous candles, but by a theoretically infinite history of candles. This makes them return slightly different results depending on the tested period. Although this effect is often assumed negligible, John Ehlers demonstrated
- 1 month ago, 21 Jun 2020, 10:01am -
Fighting racism starts with a baby step [Ran Aroussi]
While most people agree that black lives matter (why shouln't they?), many also feel that the "PC Police" has gone too far with demands to ban movies like "Gone with the Wind", removing statues of historical figures, or renaming words like "blacklist". Here are my
- 1 month ago, 21 Jun 2020, 10:01am -
Do Option Prices Inform Stock Returns? [Alpha Architect]
In perfectly efficient markets, option prices should not convey any new information or contribute to the price discovery of underlying assets. However, if markets are not perfectly efficient, traders with private information might prefer to transact in option markets over stock markets even though
- 1 month ago, 18 Jun 2020, 09:47pm -
More Work on RVFL Networks [Dekalog Blog]
Back in November last year I posted about Random Vector Functional Link (RVFL) networks here and here. Since then, along with my recent work on Oanda's API Octave functions and Market/Volume Profile visualisation, I have continued looking at RVFL networks and this post is an update on this
- 1 month ago, 18 Jun 2020, 09:47pm -
Trend-following, volatility targeting and Ensembles for Bitcoin [Beat Passive]
Today we’ll incrementally build a strategy using trend-following, volatility targeting, and ensemble models and we’ll use Bitcoin as our use-case. Why bitcoin? Because it’s a maddening asset-class that’s extremely volatile over short periods of time and seemed like a fun place to test these
- 1 month ago, 17 Jun 2020, 11:29am -
What is the difference between Extra Trees and Random Forest? [Quant Dare]
Extra Trees and Random Forest are two very similar ensemble methods and often a doubt arises as to whether to use one or the other. What is really the difference between them? In previous posts, “Random forest: many are better than one”, we have seen how to create a Random Forest from decision
- 1 month ago, 17 Jun 2020, 11:29am -
ReSolve Riffs on Gold vs Treasury as Disaster Protection [Invest Resolve]
This is “ReSolve’s Riffs” – live on Youtube every Friday afternoon to debate the most relevant investment topics of the day. The recent pandemic-led selloff has once again highlighted the importance of having ballast in portfolios to deal with extreme equity volatility – and ultimately
- 1 month ago, 17 Jun 2020, 11:29am -
Free Online Event from AI & Data Science in Trading: June 22-26
AI & Data Science in Trading Digital Week brings together experts in the use of AI and advanced data analytic techniques within asset management, primarily for finding alpha, managing risk and optimizing portfolios. Join us for a week long online event from wherever you are in the world. Use
- 1 month ago, 16 Jun 2020, 01:31pm -
Trading Costs Wipe Out the Overnight Return Anomaly [Alpha Architect]
At least once a year, the press and Twittersphere propagate the mistaken idea that investors can earn excess returns by buying the S&P 500 at the close of the market, then selling it at the open the next day. The logic is that by exposing themselves to only overnight returns, investors can seek
- 1 month ago, 16 Jun 2020, 12:53pm -
Defensive & Diversifying Strategies: What Worked in 2020? [Factor Research]
Defensive smart beta strategies like Low Volatility did not offer much capital protection in 2020 Long-short multi-factor investing generated negative returns, but still offered diversification benefits Managed futures finally found their redemption given positive & uncorrelated returns
- 1 month ago, 16 Jun 2020, 12:52pm -
Order Flow Correlation May Imply Momentum Factor Crowding [Alpha Architect]
This study is one of several studies reviewed here and here, attempting to measure factor crowding. This article specifically examines the presence of factor crowding by estimating the correlation between market order flow with the magnitude of the factor signal to trade. They hypothesize that
- 1 month ago, 15 Jun 2020, 08:24pm -
Portfolio simulations [OSM]
In our last post, we compared the three most common methods used to set return expectations prior to building a portfolio. Of the three—historical averages, discounted cash flow models, and risk premia models—no single method dominated the others on average annual returns over one, three, and
- 2 months ago, 13 Jun 2020, 12:20pm -
Monster Factor Correlation Chart [Alpha Architect]
We recently added a monster correlation matrix to our factor library data sheet that maps out the correlation of all the factors against every other factor. Here is a sample output that highlights the difference in the correlations between value factors and different quality factors. Note the big
- 2 months ago, 12 Jun 2020, 12:53pm -
Research Review | 12 June 2020 | Forecasting [Capital Spectator]
Breaking Bad Trends Ashish Garg (Research Affiliates), et al. May 7, 2020 We document and quantify the negative impact of trend breaks (i.e., turning points in the trajectory of asset prices) on the performance of standard trend-following strategies across several assets and asset classes. The
- 2 months ago, 12 Jun 2020, 12:53pm -
5 Surprising Things We Learned from a Factor Investing Expert [Alpha Architect]
Lu Zhang and his colleagues made some waves with their new paper, “Replicating Anomalies.” (now published in the RFS — congrats!). We have a summary of the paper here. Lu Zhang, and his colleagues, Kewei Hou and Chen Xue, spent nearly 3 years carefully compiling and replicating 447
- 2 months ago, 11 Jun 2020, 12:29pm -
How to extend ETF prices with mutual fund data using SQL [Robot Wealth]
On Zero to Robot Master Bootcamp, we teach how to build a portfolio of three automated systematic trading strategies. One of them is a long term Risk Premia Harvesting strategy which trades asset class ETFs. ETFs are useful instruments for analysing long term (tradeable) performance of various asset
- 2 months ago, 8 Jun 2020, 11:09pm -
Counterpoint: ETF Activity May Make the Stock Market MORE Efficient [Alpha Architect]
The Securities and Exchange Commission (SEC) has called for more research and discussion on the impacts of ETFs. In a previous post, we covered why ETF’s have not screwed up correlations, liquidity, and alpha opportunities. However, here is another post from Wes that outlines arguments that ETFs
- 2 months ago, 8 Jun 2020, 11:08pm -
Tail Hedging [Flirting with Models]
The March 2020 equity market sell-off has caused many investors to re-investigate the potential benefits of tail risk hedging programs. Academic support for these programs is quite limited, and many research papers conclude that the cost of implementation for naïve put strategies out-weighs the
- 2 months ago, 8 Jun 2020, 09:44am -
Musings on Low Volatility [Factor Research]
The Low Volatility strategy failed to protect investors in March and April 2020 Industrials & materials generated positive and technology & real estate negative relative performance Low Vol strategies do not deliver ESG benefits INTRODUCTION Low volatility (Low Vol) strategies have gained
- 2 months ago, 8 Jun 2020, 09:43am -