Quant Mashup
Simple Vol Estimators [Falkenblog]
While short-term asset returns are unpredictable, volatility is highly predictable theoretically and practically. The VIX index is a forward-looking estimate of volatility based on index option prices. Though introduced in 1992 it has been calculated back to 1986, because when released they wanted
- 1 month ago, 12 Feb 2020, 10:19pm -
Factor Investing Update: An Analysis of 2019 U.S. Factor Returns [Alpha Architect]
In case you missed it, 2019 was a good year to be an equity investor. Examining market-cap-weighted indices, the U.S. stock market was up ~ 30%, Developed International Markets were up ~ 22%, and Emerging Markets were up ~ 18%. But how did factors do in 2019? Below I update my post from last year,
- 1 month ago, 11 Feb 2020, 11:59am -
Investing in "Distressed" TAA Strategies [Allocate Smartly]
In response to a member question: Have you ever looked at a systematic approach that invested only in tactical asset allocation strategies that were experiencing a significant drawdown? We know that performance chasing is a flawed behavioral bias, so an approach like this could exploit it. We always
- 1 month ago, 10 Feb 2020, 09:55am -
Payoff Diversification [Flirting with Models]
At Newfound, we adopt a holistic view of diversification that encompasses not only what we invest in, but also how and when we make those investment decisions. In this three-dimensional perspective, what is correlation-based, how is payoff-based, and when is opportunity-based. In this piece, we
- 1 month ago, 10 Feb 2020, 09:55am -
Timing Low Volatility with Factor Valuations [Factor Research]
Factors can be valued like stocks or markets The Low Volatility factor in the US had the best subsequent returns when cheapest and worst when most expensive However, the perspective is less clear when analyzing European and Japanese stock markets INTRODUCTION Funds flows are frequently analyzed by
- 1 month ago, 10 Feb 2020, 09:54am -
Python Regression Analysis: Drivers of German Power Prices [Philipp Kahler]
German Power prices can be explained by supply and demand, but also by causal correlations to underlying energy future prices. A properly weighted basket of gas, coal and emissions should therefore be able to resemble the moves of the power price. This article will introduce multivariate regression
- 1 month ago, 10 Feb 2020, 09:54am -
Deep Learning for Quants: (1) Setting Up Keras and TensorFlow 2.1+ Environment in Python [Quant at Risk]
It would be too easy to kick off the series of lectures supplementing my Python for Quants ebooks starting from Machine Learning (ML) as an innovation. ML-based algorithms pay dividends when your problem is fairly well defined and data allow to capture the patterns where they exist. Deep Learning
- 1 month ago, 9 Feb 2020, 01:25pm -
SHARPEn your portfolio [OSM]
In our last post, we started building the intuition around constructing a reasonable portfolio to achieve an acceptable return. The hero of our story had built up a small nest egg and then decided to invest it equally across the three major asset classes: stocks, bonds, and real assets. For that we
- 1 month ago, 8 Feb 2020, 08:54pm -
Tracking investor expectations with ETF data [SR SV]
Retail investors’ return expectations affect market momentum and risk premia. The rise of ETFs with varying and inverse leverage offers an opportunity to estimate the distribution of such expectations based on actual transactions. A new paper shows how to do this through ETFs that track the
- 1 month ago, 8 Feb 2020, 08:54pm -
What is the Bitcoin's Risk-Free Interest Rate? [Quantpedia]
Cryptocurrencies, and most notably Bitcoin, are recognized as decentralized currencies. While some see Bitcoin (BTC) as a payment method of the future, others see it as a speculative asset class. No doubt, many have gained on the skyrocketing prices of BTC, but note that many have lost. Despite the
- 1 month ago, 7 Feb 2020, 11:13am -
The Case Against REIT's [Alpha Architect]
Surveys often reveal investor behavior that is challenging to understand. For example, Preqin’s Alternative Investor Outlook for H2 2019 highlighted the following: 65% of institutional investors believe that real estate is overvalued and a correction likely to occur in 2019, 2020, or beyond.
- 2 months ago, 6 Feb 2020, 12:18pm -
What is the right way to set stop losses? [Investment Idiocy]
Stop losses are the most common method used by traders to control risk. However, they're often used inappropriately. In this post I'll quickly bust some of the myths around them, and explain how to use them properly. This is the first of three posts aimed at answering three fundamental
- 2 months ago, 6 Feb 2020, 09:46am -
Inverse Volatility Sizing Index [Alvarez Quant Trading]
In my last post, Inverse Volatility Position Sizing, I tested inverse volatility sizing on a monthly rotation strategy. I saw very little difference in the rest results versus equal position sizing. I was talking to a trading friend about the research and how I was surprised at how there was not any
- 2 months ago, 5 Feb 2020, 01:31pm -
Factor Risk and Return [Falkenblog]
Factor returns should reflect risk, in that they have traditionally been interpreted as proxies for some kind of risk not measured by beta. The idea is that perhaps what people really care about is whether there will be another oil shock, and nothing matters as much. Stocks that have a high
- 2 months ago, 5 Feb 2020, 04:09am -
Visualising ETFs with UMAP [Quant Dare]
In previous posts (Visualising Fixed Income ETFs with T-SNE) we have talked about dimensionality reduction algorithms to visualize financial assets and find recognizable patterns. The conclusions were that it didn’t perform well compared to PCA, which is a more classical approach. Can we do any
- 2 months ago, 5 Feb 2020, 04:09am -
QuantMinds International Conference in Hamburg, Germany, May 11-15 [Quant Minds]
The world's leading quant finance conference 450+ experts from banks, buy-side, regulators, Silicon Valley, academia and beyond examine every facet of quant in five amazing days Key themeslatest agenda SPECIALIST FOCUS. SPECIALIST KNOWLEDGE. Maximise your experience with our full-day summit or
- 2 months ago, 4 Feb 2020, 08:58pm -
Book Review: Smart(er) Investing by Elisabetta and Tommi [Alpha Architect]
It’s not often I get the opportunity to write a book review for our fellow teammates and the best authors on our website — Elisabetta Basilico and Tommi Johnsen! If you haven’t read Elisabetta and Tommi’s mountain of blog posts on our site you’ve been hiding under a rock somewhere (or
- 2 months ago, 4 Feb 2020, 11:34am -
How to Learn Advanced Mathematics Without Heading to University - Part 4 [Quant Start]
It has been some time since wrote Parts I, II and III of our popular series of articles on How to Learn Advanced Mathematics Without Heading to University. Many of you have contacted us asking for the final Part IV of the series. We have now completed our internal research and can present our view
- 2 months ago, 4 Feb 2020, 11:33am -
Sneak Peak: Robustness to Noise [Allocate Smartly]
This is an early preview of a new analytical tool we’ll be adding to our platform later this month. Learn more about what we do. Broadly speaking, the goal of tactical asset allocation is to take advantage of broad market trends via trend-following and/or momentum. Those trends can be difficult to
- 2 months ago, 3 Feb 2020, 10:10am -
Can Managed Futures Offset Equity Losses? [Flirting with Models]
Managed futures strategies have historically provided meaningful positive returns during left-tail equity events. Yet as a trading strategy, this outcome is by no means guaranteed. While trend following is “mechanically convex,” the diverse nature of managed futures programs may actually prevent
- 2 months ago, 3 Feb 2020, 10:10am -
Machine learning and macro trading strategies [SR SV]
Machine learning can improve macro trading strategies, mainly because it makes them more flexible and adaptable, and generalizes knowledge better than fixed rules or trial-and-error approaches. Within the constraints of pre-set hyperparameters machine learning is continuously and autonomously
- 2 months ago, 3 Feb 2020, 10:09am -
Sentiment and Factor Performance [Factor Research]
Stock sentiment can be aggregated from public sources using a big data approach Results indicate that sentiment has some predictability for short-term factor performance Positive sentiment resulted in higher subsequent returns than negative sentiment INTRODUCTION Albert Einstein famously stated that
- 2 months ago, 3 Feb 2020, 10:08am -
Is AI coming after your job? [Mathematical Investor]
It is no secret that artificial intelligence (AI) systems have made enormous strides in recent years, partly due to the adoption of Bayesian (probability-based) machine learning techniques rather than the rule-based techniques used until about 20 years ago. AI systems have advanced in lockstep with
- 2 months ago, 31 Jan 2020, 09:54am -
Low Volatility-Momentum Factor Investing Portfolios [Alpha Architect]
Factor investing is hard and some factors make it harder than others. A value strategy results in a portfolio of stocks that exhibit temporary or structural issues and are usually rated “Sell” by brokers, which makes these emotionally challenging to hold. Small caps are companies that are
- 2 months ago, 31 Jan 2020, 09:54am -
Generating OHLC bars with Generative Adversarial Networks [Quant Dare]
Open-High-Low-Close (OHLC) bars are a type of financial data typically used to represent daily movements in the price of a financial instrument. They give us more information about certain characteristics of the series than line charts, such as intraday volatility or daily momentum. Could Generative
- 2 months ago, 31 Jan 2020, 09:53am -
Quantitative Analytics: Optimal Portfolio Allocation [R Shenanigans]
The literature in portfolio optimisation has been around for decades. In this post I cover a number of traditional portfolio optimisation models. The general aim is to select a portfolio of assets out of a set of all possible portfolios being considered with a defined objective function. The data:
- 2 months ago, 29 Jan 2020, 11:07am -
Is the Fama-French Model Dead? [Falkenblog]
When I was in graduate school at Northwestern in the early 90s the hot financial topics were all related to finding and estimating risk factors: Arbitrage Pricing Theory via latent factors (Connor and Koraczyk 1986), Kalman filter state-space models (eg, Stock and Watson 1989), and method of moment
- 2 months ago, 29 Jan 2020, 09:07am -
The predictability of crowding on factor strategy performance [Alpha Architect]
The focus of this study is on the response of typical or systematic risk premia to crowding (large inflows of capital). In particular, the paper focused on documenting the response of commonly recognized systematic risk premia strategies to periods, following the identification of crowded
- 2 months ago, 29 Jan 2020, 09:06am -
Blending Buy & Hold with Tactical, A "Lethargic" Approach to Asset Allocation [Allocate Smartly]
This is a test of a new paper from Dr. Wouter Keller titled Growth-Trend Timing and 60-40 Variations: Lethargic Asset Allocation (LAA). This is primarily a buy & hold strategy that’s roughly based on the classic “Permanent Portfolio”, but it includes an element of tactical asset
- 2 months ago, 27 Jan 2020, 10:01am -
Understanding Pointwise Mutual Information [Eran Raviv]
The term mutual information is drawn from the field of information theory. Information theory is busy with the quantification of information. For example, a central concept in this field is entropy, which we have discussed before. If you google the term “mutual information” you will land at some
- 2 months ago, 27 Jan 2020, 10:01am -
Fighting U.S. FOMO [Flirting with Models]
U.S. equities have out-performed international equities for 8 of the past 10 years, but this trend has tended to flip-flop historically and persist for multi-year stretches. Home country bias is a real phenomenon that investors have to deal with, especially during these streaks where U.S. equities
- 2 months ago, 27 Jan 2020, 10:00am -
Liquidity and Factor Performance [Factor Research]
Most institutional investors can only trade the largest, most liquid stocks Introducing minimum liquidity requirements impacts factors differently Factor portfolio construction with liquidity constraints is especially challenging in small stock markets INTRODUCTION Index funds have breached $11
- 2 months ago, 27 Jan 2020, 10:00am -
Portfolio starter kit [OSM]
Say you’ve built a little nest egg thanks to some discipline and frugality. And now you realize that you should probably invest that money so that you’ve got something to live off of in retirement. Or perhaps you simply want to earn a better return than stashing your cash underneath your bed, I
- 2 months ago, 26 Jan 2020, 11:16am -
How to Turn Cross-Sectional into Time-Series Momentum [Alpha Architect]
A point of confusion for many new quant momentum investors is the difference between Time- Series Momentum and Cross-Sectional Momentum: Time-series (TS) looks at each individual stock’s momentum and owns assets with positive momentum while shorting those with negative momentum; Cross-sectional
- 2 months ago, 26 Jan 2020, 11:16am -
The q-factor model for equity returns [SR SV]
Investment-based capital asset pricing looks at equity returns from the angle of issuers, rather than investors. It is based on the cost of capital and the net present value rule of corporate finance. The q-factor model is an implementation of investment capital asset pricing that explains many
- 2 months ago, 26 Jan 2020, 11:16am -
The Hidden Risk FIRE Investors Miss [Movement Capital]
The financial independence, retire early (FIRE) movement has gained a lot of traction. “We retired at 30” headlines get clicks and have made people question the typical retirement timetable: A main goal for those pursuing FIRE is to reach a portfolio balance that can reasonably fund their
- 2 months ago, 23 Jan 2020, 11:51am -
Visualization Sector Trends with R Code [Alpha Architect]
Welcome to a year-end installment of Reproducible Finance with R, a series posts that will be a little bit different from the norm on Alpha Architect (see here for my last post). We will search for and hopefully unearth some interesting market conditions, but we’ll primarily focus on the code that
- 2 months ago, 23 Jan 2020, 11:50am -
Pre-Election Drift in the Stock Market [Quantpedia]
There are many calendar / seasonal anomalies by which we can enhance our overall investment strategy. One of the least frequent but still very interesting anomalies is for sure the Pre-Election Drift in the stock market in the United States. This year is the election year, and public discussion is
- 2 months ago, 23 Jan 2020, 11:50am -
Correlations Profile | Major Asset Classes | 23 January 2020 [Capital Spectator]
Return correlations for the major asset classes have edged down in recent years, which implies that diversification opportunities have increased, if only marginally. The correlation readings are only modestly softer overall and for several asset class pairings it’s fair to say that nothing much
- 2 months ago, 23 Jan 2020, 11:49am -
Persistency Beyond Almost All Other Rallies [Quantifiable Edges]
Last week I noted the current rally was reaching historical extremes for persistency. Here I will look at another study from the subscriber letter, and then update last week’s study. In last night’s letter I looked at all times back to the inception of the NASDAQ in 1971 in which both SPX and
- 2 months ago, 22 Jan 2020, 10:27pm -
Calculating a VIX3M Style Index Back to 1990 Reveals Surprising Trends [Six Figure Investing]
The Cboe’s VIX® (30-day) and VIX3M (93-day) indexes enable us to quantify volatility term structures but until now, historical analyses between VIX style indexes have been limited to dates after December 2001. This post introduces the results of VIX3M style calculations back to 1990, and reviews
- 2 months ago, 22 Jan 2020, 10:06am -
Skew who? [OSM]
In our last post on the SKEW index we looked at how good the index was in pricing two standard deviation (2SD) down moves. The answer: not very. But, we conjectured that this poor performance may be due to the fact that it is more accurate at pricing larger moves, which occur with greater frequency
- 2 months ago, 21 Jan 2020, 10:27pm -
Quant Summit Europe, March 11-12, 2020 in London
Machine learning, quantum computing and beyond: cutting-edge quant solutions to finance problems Quant Summit Europe gives you the opportunity to meet with, learn and exchange ideas with over 130 renowned industry quants and data scientists from the world’s leading banks, buy-side institutions and
- 2 months ago, 21 Jan 2020, 11:36am -
Enterprise Multiples and Expected Stock Returns [Alpha Architect]
One of the foundation concepts of the Alpha Architect investment philosophy is the utilization of Enterprise Multiples in the value discovery process. Enterprise multiples are often referred to as the “business buyer metric” and are a key valuation tool used by investment bankers and business
- 2 months ago, 21 Jan 2020, 11:36am -
Should I Stay or Should I Growth Now? [Flirting with Models]
Naïve value factor portfolios have been in a drawdown since 2007. More thoughtful implementations performed well after 2008, with many continuing to generate excess returns versus the market through 2016. Since 2017, however, most value portfolios have experienced a steep drawdown in their relative
- 2 months ago, 21 Jan 2020, 10:25am -
The Scholz Brake: Fixing Germany’s New 1000% Trader Tax [Financial Hacker]
Would you like to read a 18-page pounderous law draft titled “Law for introducing a duty to report cross-border tax structuring”? The members of the German Bundestag apparently didn’t. Nothing can be said against reporting cum-ex or similar constructs, so the new law, proposed by finance
- 2 months ago, 20 Jan 2020, 12:55pm -
Diversification [Falkenblog]
I was interested in calculating what the portfolio volatility would be for a portfolio given various correlation assumptions, and also the number of assets. So I took two portfolio of the S&P500 in two very different years: 2008 and 2017. The VIX had one of its highest average levels in 2008, at
- 2 months ago, 20 Jan 2020, 12:55pm -
Private Equity: Fooling Some People All the Time? [Factor Research]
Private equity return data should be viewed with caution Returns are likely overstated while volatility is understated Private equity returns are highly correlated to public equities TWO MAGIC WORDS “This time is different” might be the four most dangerous words in investing. “Uncorrelated
- 2 months ago, 20 Jan 2020, 12:55pm -
Breaking Down 50 Years of Industry Data [Fortune Financial]
It has long been a belief of mine that the industry in which a company operates has a huge impact on its performance, and that most industries simply are not worthwhile for long-term investment consideration. To further this discussion, I took the detailed industry data found in Professor Ken
- 2 months ago, 18 Jan 2020, 11:33am -
Research Review | 17 January 2020 | Volatility [Capital Spectator]
Macro News and Long-Run Volatility Expectations Anders Vilhelmsson (Lund University) December 10, 2019 I propose a new model-free method for estimating long-run changes in expected volatility using VIX futures contracts. The method is applied to measure the effect on stock market volatility of
- 2 months ago, 18 Jan 2020, 11:32am -