Quant Mashup Controversial Post: QuantConnect and the Challenge of Democratizing Finance [Quant Rocket]QuantConnect, a quantitative backtesting and trading platform serving mostly retail traders, recently announced a crowdfunding campaign seeking to raise money from its community of users. The company's associated regulatory disclosures (required by the SEC for equity crowdfunding offerings)(...) The decline in interest rates: its role in asset pricing anomalies [Alpha Architect]At its most basic level, factor-based investing is simply about defining, and then systematically following, a set of rules that produce diversified portfolios. An example of factor-based investing is a value strategy, buying cheap (low valuation) assets and selling expensive (high valuation)(...) Trading Strategy Monitoring: Modeling PnL as Geometric Brownian Motion [Portfolio Optimizer]Systematic trading strategies have the unfortunate habit of exhibiting worse performances in real-life than in backtests, partially due to backtest overfitting1. Monitoring their behavior once they are deployed in production is then very important to be able to detect as early as possible any(...) MOIC: Investing Holy Grail [Quant Dare]Many investors are looking for the holy grail of investing. They all want a magic formula that tells them which stocks to buy, and which ones to sell. But experienced investors know that there is no such a thing. I was convinced of it… until I discovered the MOIC formula. MOIC Multiple on Invested(...) Equity Research in the Wolfram Language [Jonathan Kinlay] Matching data between data sources with Python [Wrighters.io]Data is often messy and rarely in perfect shape. This is especially true if the data comes from many different sources and the specifications are loosely defined. If you have access to data that is in great shape, it’s probably because someone else did the dirty work of validating it, cleaning it(...) Skewness: the fallacy of the expected return [Artifact Research]In this post we will take a closer look at the expected return that is often stated for investments like stocks and other financial assets, or for certain outcomes in gambling. The point we want to convey is that the expected return is only valid for one period or a single “iteration” (say, one(...) The Cross Section of Stock Returns Pre CRSP data [Alpha Architect]What are the Research Questions? Several studies reveal variables that predict cross-sectional differences in stock returns but mainly rely on a sample of U.S. stocks, mostly covering the post-1963 period. These studies are often criticized for potential data mining issues since the database never(...) Top 10 blogs on Machine Learning in 2022 [Quant Insti]Algorithmic Trading is seeing a rapid expansion of the application of artificial intelligence (AI) and machine learning (ML). These technological developments have completely transformed Algo trading. Making informed decisions requires carefully analyzing both current and historical market data. In(...) Sector & Factor Performance During Wartime [Finominal]The S&P 500 increased during two of the three largest wars of the United States Value, size, and momentum factors had positive returns during WW II The top and worst-performing industries during WW II were diverse INTRODUCTION Before 2020, the threat of a global pandemic shutting down the world(...) Market Risk and Speculative Factors [Alpha Architect]There are basically two types of investors, those that are risk averse and, thus, both demand risk premiums for taking risk and diversify their holdings, and those who are risk seekers who have a preference for positively skewed (lottery-like) returns which leads them to speculate and concentrate(...) Optimal trend following allocation under conditions of uncertainty [Investment Idiocy]Few people are brave enough to put their entire net worth into a CTA fund or home grown trend following strategy (my fellow co-host on the TTU podcast, Jerry Parker, being an honorable exception with his 'Trend following plus nothing' portfolio allocation strategy). Most people have(...) How to Replicate Any Portfolio [Quantpedia]Would you like to see the performance of your portfolio 100 years back in history? Do you want to analyze the risk of your strategy under 100 years of real historical scenarios? All of these, and much more, will be soon (in a few days) available for Quantpedia Pro subscribers. How? We will explain(...) Momentum literature: an analysis of 30 years [Alpha Architect]n this article, the author examines the research published over the last 30 years on momentum and its theoretical credibility. One of the original momentum articles was published by Jegadeesh and Titman in 1993, and is considered the seminal work on the topic. The research review contained in this(...) Slava Ukraini! Latest from Quantocracy contributor in Ukraine: Volatility and Price of a Straddle, Are They The Same? [Only VIX]Yesterday I found another piece of ignorance on Medium: Stop Watching The VIX, Just Make Your Own tl;dr : Just use ATM straddles. This is of course not correct. As I have written before on this blog that (skipping mathematical rigor) the value of ATM straddle is or about 80% of the expected(...) Volatility-based Equity Allocations [Finominal]The VIX currently trades within its top quartile since 1990 Using volatility to time equity allocations is a widely used strategy However, it is challenging to pursue this over the long-term INTRODUCTION The One Ring from J.R.R. Tolkien’s Lord of the Rings saga is a plain gold ring unless it is(...) Building Candlesticks in Rust [Mark Best]Candlesticks are a common way to represent price and volume of an asset over a period of time. There are various common types of bars such as time, volume, tick bars, hieken-ashi, renko to name a few. There is a lot of information about the implementations of these on the internet so their details(...) Momentum Gap - its role in reducing crashes [Alpha Architect]This article discusses the academic research about the Momentum Gap and the role that its predictive potential may have in reducing momentum crashes, hence possibly improving performance. In our book “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I presented the evidence(...) Identifying market regimes via asset class correlations [SR SV]A recent paper suggests identifying financial market regimes through the correlations of asset class returns. The basic idea is to calculate correlation matrixes for sliding time windows and then estimate pairwise similarities. This gives a matrix of similarity across time. One can then perform(...) Asynchronous Trading Revisited: Practical Implications [Alpha Architect]In this article, the author examines several important questions related to asynchronous trading, or the variation in trading frequency that occurs when trading stocks or other assets. Timo Wiedemann, University of Muenster (Germany) The newest version of the paper can be found here. What are the(...) Mean Reversion Check Up 2022 [Alvarez Quant Trading]A common question I get is whether mean reversion is still working. My response is I am still trading a mean reversion strategy but the edges seem to get smaller. Over the year I have investigated this. I was asked again recently and wanted to investigate again. Here are the results of my 2022(...) Live Algo Trading on the Cloud - Vultr [Algo Trading 101]What does live algorithmic trading on the Cloud mean? Rerequisite – Basic Guide What are the pros of deploying your trading strategies to the Cloud? What are the cons of deploying your trading strategies to the Cloud? What is the Cloud Service? What is the Cloud used for? What cloud providers are(...) Fast Logging for HFT In Rust [Mark Best]In this article we’ll be discussing a fast way of logging in Rust and its application to high frequency trading. The code presented here solves two problems, one is well known, the latter less so. It is a imperative to avoid using IO operations within the strategy thread, but logging operations(...) Are hedge funds losing their hedge? [Mathematical Investor]“Hedge funds” were pioneered some 70 years ago by Australian financier Alfred Winslow Jones. His idea was to combine a “long” position (i.e., one that profits if the securities go up in price), typically a set of growth stocks, with a “short” position (i.e., one that profits if the(...) Thematic versus Momentum Investing [Finominal]Thematic products underperform the stock market on average The exposure to the momentum factor was low to negative recently Systematic performance chasing beats performance chasing with a narrative INTRODUCTION Space: the final frontier. Where no man has gone before…. Well, wealthy folks can now(...) The Effect of Indexing on Price Discovery and Limits to Arbitrage [Alpha Architect]The rise of stock indexing has raised concerns that index investing distorts stock prices—indexers are free riders who rely on prices without contributing to price discovery, thus reducing price efficiency. Byung Ahn and Panos Patatoukas, authors of the study “Identifying the Effect of Stock(...) QuantConnect Integration with MlFinLab [Hudson and Thames]Announcing that MlFinLab is fully integrated into the powerful backtesting and execution platform of QuantConnect! At the start of 2022, we set out to improve the user experience across all of our products and to improve the accessibility of our libraries. This meant integrations into platforms that(...) Correlation Matrices Denoising: Results from Random Matrix Theory [Portfolio Optimizer]The estimation of empirical correlation matrices in finance is known to be affected by noise, in the form of measurement error, due in part to the short length of the time series of asset returns typically used in their computation1. Worse, large empirical correlation matrices have been shown to be(...) The Best Defensive Asset Class [Allocate Smartly]In this post we look at what major asset classes have proven to be the best defensive choice in months when the market has fallen over the last 50+ years. We’ll look at multiple government and corporate bond assets, diversified commodities, gold and the US dollar. The results? As expected, a mixed(...) Stock-Bond Correlation, an In-Depth Look [Quantpedia]The recent surge in global inflation sent shock waves across financial markets and affected the complicated relationship between stocks and bonds. Today, we would like to present you with a review of two interesting papers, which provide both a deep and easy-to-understand examination of the(...) Causality: interest rates and fixed income assets [Quant Dare]The blog has previously addressed interest rates in a post that splits the yield rate curve into three relevant components. This time this post tries to identify the influence of interest rates on fixed income assets by using the Granger causality test. Interest rates obviously have a strong impact(...) Finding and analyzing free stock index data with Python and EDGAR [Wrighters.io]A stock index is just a list of stocks. But an index is a special list because investors use it to make investing decisions. An index is constructed via rules about stocks to include, how much to include, and when to include (or remove it). Finding this data, especially for more obscure indexes, can(...) Democracy: is it better for the stock market? [Alpha Architect]In this article, we examine the research that addresses the question of whether or not democracy leads to better possible outcomes for the stock market. Democracy and Stock Returns Xun Lei and Tomasz Piotr Wisniewski SSRN Working Paper A version of this paper can be found here Want to read our(...) Crypto-Trading with REST, part 1 [Financial Hacker]Many brokers and exchanges can nowadays be accessed online with a REST API. The days of awkward proprietary broker APIs are coming to an end. This article is a step by step instruction of implementating a REST API interface in plain C for connecting a trading system to the Bittrex cryptocurrency(...) Is the Carry Trade a Diversifying Strategy? [Finominal]The carry trade was positive across most asset classes in YTD 2022 The correlations to the S&P 500 were low historically However, the carry trade crashed when stocks crashed, ie provided limited diversification benefits INTRODUCTION After a few years in unchartered territories, most bonds have(...) Slava Ukraini! Latest from Quantocracy contributor in Ukraine: Natural Clustering in VIX Futures Data [Only VIX]If you take all available VIX futures data and create a scatterplot of daily settlement prices as a function of time to expiration you will see a curious pattern: Yes, there are clear clusters in prices. But what do these clusters mean? The simple explanation is that the VIX term structure passes(...) Volatility and Expected Range, Are They The Same? [Only VIX]This is not a post to correct some abstract mathematical technicality, or a semantic point. Rather I hope to shed some light on widespread mis-estimation of important risk metric that I often see on the internet. For example this double-decker of ignorance popped up on my twitter feed today. VIX as(...) Jobs growth as trading signal [SR SV]Employment growth is an important and underestimated macro factor of financial market trends. Since the expansion of jobs relative to the workforce is indicative of changes in slack or tightness in an economy it serves as a predictor of monetary policy and cost pressure. High employment growth is(...) Lottery Demand and the Asset Growth Anomaly [Alpha Architect]It is well documented in the literature that over the long term, low-investment firms have outperformed high-investment firms—with the negative relation between asset growth (AG) and future stock returns particularly featured by the overvaluation of high AG stocks. This finding has led to the(...) How to Improve Post-Earnings Announcement Drift with NLP Analysis [Quantpedia]Post–earnings-announcement drift (abbr. PEAD) is a well-researched phenomenon that describes the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for some time (several weeks or even several months) following an earnings announcement. There(...) $NDX Performance After 5 Down Days and a 150-Day Low [Quantifiable Edges]The two big up days to start last week have now been followed by 5 down days in a row. And the 5-day selloff has put the NDX at a new bear-market closing low. The study below looks at other times since 1990 that NDX closed down for the 5th consecutive day and at a 150-day low. NDX performance after(...) Sell in May and go away… Just won’t go away [Quant Dare]In this post we are going to revisit (check previous post) the catchy market maxim ”sell in May and go away”. After 2 bear markets in the last 3 years and yet another red September, once again, here I am in October, wishing I had sold in May. Let’s simulate the different variations of this(...) Building a Raspberry Pi Cluster for QSTrader Using SLURM - Part 4 [Quant Start]In the previous article in this series we installed and configured SLURM to enable us to parellelise work loads. In this article we will be using SLURM to install QSTrader on all our secondary nodes. This will enable us to multiple run parameter sweeps for backtests of single or multiple strategies(...) Random Forests and Boosting for ARCH-like volatility forecasts [Sarem Seitz]In the last article, we discussed how Decision Trees and Random Forests can be used for forecasting. While mean and point forecasts are the most obvious applications, they might not always be the most useful ones. Consider the classic example of financial returns, where the conditional mean is hard,(...) Conditional Portfolio Optimization [EP Chan]Previously on this blog, we wrote about a machine-learning-based parameter optimization technique we invented, called Conditional Parameter Optimization (CPO). It appeared to work well on optimizing the operating parameters of trading strategies, but increasingly, we found that its greatest power(...) Momentum Everywhere, Including Emerging Markets [Alpha Architect]In order for investors to determine which of the hundreds of factors in what John Cochrane famously called the “zoo of factors” were worthy of investment, Andrew Berkin and I set out seven criteria in our book “Your Complete Guide to Factor-based Investing.” For a factor to be considered, it(...) Research Review | 7 Oct 2022 | Interest Rates and Inflation [Capital Spectator]The Factor Multiverse: The Role of Interest Rates in Factor Discovery Jules H. van Binsbergen (University of Pennsylvania), et al. September 2022 We study the importance of the decline in interest rates in the discovery of asset pricing anomalies. We investigate 153 discovered anomalies as well as(...) Multi Strategy Management for Your Portfolio [Quantpedia]If you follow Quantpedia’s blogs, you probably know that Quantpedia PRO already contains multiple risk management and portfolio construction tools for your quantitative investment strategies. For example, Crisis Hedge can find you suitable investment hedges for negative months and for bear(...) Factor Olympics Q3 2022 [Finomial]Value is leading the performance scoreboard in YTD 2022 Low volatility is the worst-performing factor Oddly, the value and low volatility factors are strongly positively correlated INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years.(...) Transaction costs and portfolio strategies [SR SV]Transaction costs are a key consideration for the development of trading strategies; and not just in final profitability checks. Indeed, disregard for trading costs at the design stage leads to excessive reliance on fleeting small-scale characteristics for return predictors. It also skews the(...)