Quant Mashup
A Short Take on Real-World Pairs Trading [Robot Wealth]
In textbooks, one often sees pairs trading algorithms start by regressing prices of Asset A on Asset B to calculate a hedge ratio. I’ve rarely seen anyone actually do this in the real world. That’s because it is a very unstable thing – especially for a pair of volatile assets, and especially
- 3 months ago, 12 Jan 2024, 10:39pm -
Peer-Reviewed Theory and Expected Stock Returns [Alpha Architect]
As professor John Cochrane observed, the literature on investment factors now fills a veritable “factor zoo,” with hundreds of options. How do investors select from among this huge array of possibilities? In order to minimize the risk that outcomes result from data mining, in our book “Your
- 3 months ago, 12 Jan 2024, 10:39pm -
Research Review | 11 January 2024 | Fat Tail Distributions [Capital Spectator]
Optimal Portfolio Choice with Fat Tails and Parameter Uncertainty Raymond Kan (U. of Toronto) and Nathan Lassance (LFIN/LIDAM) December 2023 Existing portfolio combination rules that optimize the out-of-sample performance under estimation risk are calibrated assuming multivariate normally
- 3 months ago, 12 Jan 2024, 10:38pm -
Skew preferences for crypto degens [Investment Idiocy]
An old friend asking for help... how can I resist? Here is the perplexing paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4042239 And here is the (not that senstional) abstract: Bitcoin (BTC) returns exhibit pronounced positive skewness with a third central moment of approximately 150%
- 3 months ago, 10 Jan 2024, 09:38pm -
How Do You Take Your Commodities? [Return Sources]
Most portfolios are centered around stocks. Stocks are thought of as the primary return driver, while other additions to the portfolio are thought of less as return drivers, and more as diversifiers. The popular 60 / 40 portfolio is a prime example of this. The vast majority of the returns to this
- 3 months ago, 10 Jan 2024, 09:38pm -
Choi's Dividend & Growth Allocation [Allocate Smartly]
This is a test of Paul Choi’s paper Balance Between Growth and Dividend: Dividend & Growth Allocation (DGA). This strategy would have delivered exceptional performance over the last 50 years, but we would temper future expectations for several reasons we discuss below. Backtested results from
- 3 months ago, 9 Jan 2024, 07:26am -
Sparse Index Tracking: Limiting the Number of Assets in an Index Tracking Portfolio [Portfolio Optimizer]
In the previous post, I introduced the index tracking problem1, which consists in finding a portfolio that tracks as closely as possible2 a given financial market index. Because such a portfolio might contain any number of assets, with for example an S&P 500 tracking portfolio possibly
- 3 months ago, 9 Jan 2024, 07:25am -
Defensive factor strategy - how do you build one? [Alpha Architect]
Is there a defensive equity factor? Can one be built? Although it seems like an easy question, the answer is not straightforward. The authors of this piece argue for a careful assessment of factor strategies to deliver a defensive profile convincing enough to attract investors. A defensive
- 3 months ago, 9 Jan 2024, 07:25am -
Duration of U.S. Equities [Finominal]
Sectors and factors were not very sensitive to changes in interest rates on average However, the averages are misleading as the sensitivity varies significantly over time The duration of factors was more dispersed than that of sectors INTRODUCTION If equity investors are from Mars, then fixed-income
- 3 months ago, 9 Jan 2024, 07:25am -
Why Do US Stocks Outperform EM and EAFE Regions? [Quantpedia]
Investing in emerging markets (EM) or developed markets (DM) outside of the United States tends to follow cyclical trends. At times, it becomes popular and crowded to focus solely on U.S. stocks, while in other periods, the trend shifts to favor everything except U.S. equities. This inclination
- 3 months ago, 5 Jan 2024, 08:22pm -
Crowded Trades Increase Crash Risks [Alpha Architect]
Arbitrageurs keep markets efficient by moving prices to reflect their fundamental values. However, anomalies can persist because of limits to arbitrage—the costs and risks of shorting. The costs and risks of shorting, however, are not the only risks that arbitrageurs face. The publication of
- 3 months ago, 5 Jan 2024, 08:22pm -
Sketching the Option Backtester v2 (with Code downloadable for ALL readers) [Hanguk Quant]
In the last post, we wrote code to test for the pnl of a system that continuously rebalances and shorts the atm straddle on index options. Sketching the Option Backtester (with Code downloadable for ALL readers) HangukQuant · December 21, 2023 Sketching the Option Backtester (with Code downloadable
- 3 months ago, 4 Jan 2024, 06:20pm -
A Deep Dive into Volatility Targeting [Return Sources]
In the world of trend following, the biggest, most longstanding debate is about whether or not to target a certain level of volatility on an ongoing basis. Listeners of the podcast Top Traders Unplugged will be very familiar with this debate. Unfortunately, some of the language surrounding this
- 3 months ago, 2 Jan 2024, 07:30pm -
Most popular posts – 2023 [Eran Raviv]
This blog is just a personal hobby. When I’m extra busy as I was this year the blog is a front-line casualty. This is why 2023 saw a weaker posting stream. Nonetheless I am pleased with just over 30K visits this year, with an average of roughly one minute per visit (engagement time, whatever
- 3 months ago, 2 Jan 2024, 07:29pm -
Factor Olympics 2023 [Finominal]
The performance of factors was unexciting and poor in 2023 Quality performed the best, low volatility the worst Low-risk and cheap stocks are currently highly correlated INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years. Specifically, we only
- 3 months ago, 2 Jan 2024, 07:28pm -
The Weekend Effect in the Market Indices [Relative Value Arbitrage]
The weekend (or Monday) effect in the stock market refers to the phenomenon where stock returns exhibit different patterns on Mondays compared to the rest of the week. Historically, there has been a tendency for stock prices to be lower on Mondays. Various theories attempt to explain the weekend
- 3 months ago, 1 Jan 2024, 09:57pm -
Quickly store 2,370,886 rows of historic options data with ArcticDB [PyQuant News]
Over 1,200,000 options contracts trade daily. Storing options data for analysis has become something only professionals can do using sophisticated tools. One of the professionals recently open sourced their tools for lightening fast data storage and retrieval. ArcticDB is a DataFrame database that
- 3 months ago, 30 Dec 2023, 03:16am -
Tracking systematic default risk [SR SV]
Systematic default risk is the probability of a critical share of the corporate sector defaulting simultaneously. It can be analyzed through a corporate default model that accounts for both firm-level and communal macro shocks. Point-in-time estimation of such a risk metric requires accounting data
- 3 months ago, 30 Dec 2023, 03:16am -
The Financial Distress Puzzle [Alpha Architect]
That riskier assets should command higher expected returns is the most basic of asset pricing theories. Clearly, financial distress is a risk characteristic, but it presents a puzzle, as there has not been a linear relationship between it and stock returns. For example, John Birge and Yi Zhang,
- 3 months ago, 30 Dec 2023, 03:16am -
Differentiated Trend Following [Return Sources]
Trend following boils down to one basic idea: buy when the price goes up, and sell when it goes down. Its implementation, though, could be much more complicated. There are a myriad methods and timeframes to choose from, and these methods and timeframes are by and large the dials that CTAs can turn
- 3 months ago, 26 Dec 2023, 10:08pm -
Easily cross-validate parameters to boost your trading strategy [PyQuant News]
Trading strategies often rely on parameters. To enhance and effectively cross-validate these parameters can provide a competitive advantage in the market. However, reliable cross-validation strategies can lead to look-ahead bias and other pitfalls that can lead to overestimating a strategy’s
- 3 months ago, 26 Dec 2023, 07:13pm -
Are stock returns predictable at different points in time? [Alpha Architect]
The question of whether stock returns are predictable is of long-standing interest to both academics and investment practitioners. Commonly accepted investment strategies, for example, will behave quite differently in the presence of stock return predictability. The research literature is unclear on
- 3 months ago, 26 Dec 2023, 07:13pm -
Momentum Everywhere, Including Equity Options [Alpha Architect]
Because of the strong evidence, momentum continues to receive much attention from researchers. Out of the hundreds of exhibits in the factor zoo, one of just five equity factors that met all the criteria (persistent, pervasive, robust, implementable, and intuitive) Andrew Berkin and I established in
- 3 months ago, 26 Dec 2023, 07:12pm -
2023 Rally - How Strong Is It? [Alvarez Quant Trading]
This end of year rally which started on October 2023 has been strong. My trading buddy and I started wondering how this compares to the past. Is this a “normal” strong rally or an “abnormally” strong one? Determining this is always tough because it depends on the indicators you use. Because
- 3 months ago, 21 Dec 2023, 11:34pm -
Judging the Quality of Indicators [Dekalog Blog]
In my previous post I said I was trying to develop new indicators from the results of my new PositionBook optimisation routine. In doing so, I need to have a methodology for judging the quality of the indicator(s). In the past I created a Data-Snooping-Tests-GitHub which contains some tests for
- 3 months ago, 21 Dec 2023, 11:34pm -
Research Review | 21 DEC 2023 | Portfolio Design & Risk Factors [Capital Spectator]
Factor Zoo (.zip) Alexander Swade (Lancaster University) et al. October 2023 The number of factors allegedly driving the cross-section of stock returns has grown steadily over time. We explore how much this ‘factor zoo’ can be compressed, focusing on explaining the available alpha rather than
- 3 months ago, 21 Dec 2023, 11:34pm -
Trend Following VS. Volatility Capping: Two Kinds of Insurance [Return Sources]
An equity investor can purchase two kinds of financial insurance. The first, more straightforward kind, is a put option. This contract simply pays off when the S&P 500 (which we’ll use as our stand-in for “equity”) goes down. In other words, it’s like any other insurance contract. It
- 3 months ago, 20 Dec 2023, 02:04am -
Beyond Modified Value-at-Risk: Application of Gaussian Mixtures to Value-at-Risk [Portfolio Optimizer]
In a previous post, I described a parametric approach to computing Value-at-Risk (VaR) - called modified VaR12 - that adjusts Gaussian VaR for asymmetry and fat tails present in financial asset returns3 thanks to the usage of a Cornish–Fisher expansion. Modified VaR, when properly used4, provides
- 3 months ago, 19 Dec 2023, 06:52pm -
Can Machine Learning help to select mutual funds with positive alpha? [Alpha Architect]
The study emphasizes the importance of integrating machine learning with other tools for investment managers, pension-plan administrators, financial advisors, and independent analysts to help investors select active mutual funds with positive alpha. It also highlights the significance of fund
- 3 months ago, 19 Dec 2023, 06:51pm -
Spearman's rank correlation of technical indicators [Grzegorz Link]
RSI, MACD, Stochastic, ROC, CCI, %b - technical indicators come in many shapes and sizes.[1] Their names suggest something very technical at play. Maybe even scientific. Yet, they are a polarizing tool. They generate strong, opposing opinions. Some traders value them with near religious zeal, while
- 3 months ago, 19 Dec 2023, 12:15am -
Directional Change in Trading: Indicators, Python Coding, and HMM Strategies [Quant Insti]
Usually, regime detection is made with an HMM estimation over price returns or price return volatility. However, Chen and Tsang (2021) propose to use the Directional Change indicators as input for a HMM to detect regime shifts. They show that the HMM applied to the Directional Change indicators
- 3 months ago, 19 Dec 2023, 12:14am -
How to ingest premium market data with Zipline Reloaded [PyQuant News]
This article explains how to build the two Python scripts you need to use premium data to create a custom data bundle using Zipline Reloaded. Step 1: Subscribe to premium data By now you should already have an account with Nasdaq Data Link. If not, head over to https://data.nasdaq.com and set one
- 3 months ago, 19 Dec 2023, 12:13am -
Are Alternative Social Data Predictors Useful for Effective Allocation to Country ETFs? [Quantpedia]
The part of the attention of our own research from the last few months was a little skewed on the side of countries’ indices and their corresponding ETFs representing them, and we finally conclude our “trilogy” of investigation on the efficiency of these markets. Firstly, we analyzed
- 4 months ago, 16 Dec 2023, 06:06pm -
The Temptation of Factor Timing [Alpha Architect]
The timing of equity factor premiums has a strong allure for investors because academic research has found that factor premiums are both time-varying and dependent on the economic cycle. For example, Arnav Sheth and Tee Lim, authors of the December 2017 study “Fama-French Factors and Business
- 4 months ago, 16 Dec 2023, 06:05pm -
Pick the best strike and expiration for trading options [PyQuant News]
One of the hardest parts of trading options is picking the best strike price and expiration date for your strategy. Whether a simple covered call or more complex strangles, the key to success is constructing the position. But backtesting options is tough: There are millions of contracts that trade
- 4 months ago, 16 Dec 2023, 06:05pm -
How Much Damage Can I Do Turbo-Punting Shitcoins? [Robot Wealth]
Here in Australia, we’re right in the depths of the silly season. We indulge in long lunches, take days off work, and generally let our hair down. In that spirit, I thought I might have some fun punting shitcoins. (Maybe my definition of fun differs from yours, but let’s run with it). For the
- 4 months ago, 13 Dec 2023, 09:10pm -
Portfolio optimisation, uncertainty, bootstrapping, and some pretty plots. Ho, ho, ho [Investment Idiocy]
Twas the night before Christmas, and all through the house.... OK I can't be bothered. It was quiet, ok? Not a creature was stirring... literally nothing was moving basically. And then a fat guy in a red suit squeezed through the chimney, which is basically breaking and entering, and found a
- 4 months ago, 12 Dec 2023, 08:46pm -
Why A New High Before A Fed Day Is Discouraging [Quantifiable Edges]
Wednesday is a Fed Day. Fed Days have historically shown an upside tendency. I have documented this tendency in great detail over the years. A higher close today would not be the most favorable Fed Day setup. A big reason for this is that it would mark a 20-day high close. Fed Day bullishness has
- 4 months ago, 12 Dec 2023, 08:45pm -
Managed Futures Rotation [Return Sources]
Managed futures / trend following is a valuable strategy to have in a portfolio, but it's also somewhat difficult to hold. The reason is that its positive performance tends to come in bursts, as opposed to steadily over time. This can (and does) lead to frustration as the investment in managed
- 4 months ago, 11 Dec 2023, 08:31pm -
The Illusion of the Small-Cap Premium [Finominal]
Small-cap investing is intuitively appealing However, small-caps have underperformed in most markets Screening out low-quality small-caps has not helped significantly INTRODUCTION Investing means parting ways with your money, which is not something we tend to do lightly. The easiest way to get
- 4 months ago, 11 Dec 2023, 08:31pm -
Brownian Motion Simulation with Python [Quant Start]
In this article we will explore simulation of Brownian Motions, one of the most fundamental concepts in derivatives pricing. Brownian Motion is a mathematical model used to simulate the behaviour of asset prices for the purposes of pricing options contracts. A typical means of pricing such options
- 4 months ago, 10 Dec 2023, 07:24pm -
Simulation of Gary Antonacci’s Dual Momentum Sector Rotation Strategy [NLX Finance]
Here’s a backtest of Gary Antonacci’s DMSR (Dual Momentum Sector Rotation) strategy. The author is best known for his GEM (Global Equity Momentum) strategy, which he popularised in 2014, in his book « Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk »,
- 4 months ago, 10 Dec 2023, 07:24pm -
Adaptive Asset Allocation Replication [Foss Trading]
The paper, “Adaptive Asset Allocation: A Primer” by Adam Butler, Mike Philbrick, Rodrigo Gordillo, and David Varadi addresses flaws in the traditional application of Modern Portfolio Theory related to Strategic Asset Allocation. It shows that estimating return and (co)variance parameters over
- 4 months ago, 9 Dec 2023, 04:06am -
The Art and Science of Trading Carry [Robot Wealth]
Let’s talk about carry trades. First, what exactly is a carry trade? A carry trade is a trade that pays you to hold it. A position where, if nothing changes except the passing of time, you expect to make money. Let’s go through some examples. FX carry The classic example is the FX carry trade,
- 4 months ago, 9 Dec 2023, 04:06am -
Diseconomies of Scale in Investing [Alpha Architect]
Abstract: One of the problems for investment funds is that success contains the seeds of destruction as cash inflows follow outperformance. In his seminal 2005 paper, “Five Myths of Active Portfolio Management,” Jonathan Berk suggested asking, “Who gets money to manage?” He answered that
- 4 months ago, 9 Dec 2023, 04:06am -
The "Strike Price" of Long-Only Trend Following [Return Sources]
Long-only trend following is a popular way to protect equity portfolios from huge drawdowns, and for several good reasons: 1) It has the advantage of behaving somewhat like insurance, or put options, in that you’re exposed to much of the upside and not much of the downside. 2) It doesn’t damage
- 4 months ago, 6 Dec 2023, 09:37pm -
How to stream real-time options data [PyQuant News]
I’ve been trading options contracts for more than 23 years. When I started out, I had to rely on expensive broker data feeds for real-time options data for trading and low-quality free data I scraped from websites for analysis. I spent countless hours reverse engineering the CBOE website for
- 4 months ago, 6 Dec 2023, 04:38pm -
Introduction to XGBoost in Python [Quant Insti]
XGBoost…!!!! Often considered a miraculous tool embraced by machine learning enthusiasts and competition champions, XGBoost was designed to enhance computational speed and optimise machine learning model’s performance. Let's proceed with XGBoost!!! We will cover the following things: Brief
- 4 months ago, 6 Dec 2023, 04:38pm -
Forecasting time series with decomposition [PyQuant News]
In today’s newsletter, I’m going to show you how to forecast a time series of US unemployment data using decomposition. Time series decomposition is breaking down a single time series into different parts. Each part represents a pattern that you can try to model and predict. The patterns usually
- 4 months ago, 6 Dec 2023, 04:37pm -
After-Tax Performance of Actively Managed Funds [Alpha Architect]
Market efficiency, higher trading costs and higher expense ratios are not the only hurdles to successful active management (market timing and individual security selection). For taxable investors, the burden of higher taxes raises the hurdle.(1) From 2002 until now, S&P Dow Jones Indices has
- 4 months ago, 6 Dec 2023, 04:37pm -