Quant Mashup Using Momentum to Find Value [Alpha Architect]Value and momentum are two of the most powerful explanatory factors in finance. Research on both has been published for over 30 years(1). However, it was not until recently that the two had been studied in combination and across markets. Bijon Pani and Frank Fabozzi contribute to the literature with(...) Achieving a well-diversified portfolio based on Graph Theory [Quant Dare]Graph Theory is widely used in almost every area of interest for visualization or analysis purposes but, for some reason, it is not usually applied in finance. Why not trying to take advantage of its potential in portfolio management? Introduction Current uncertainty is causing very pronounced(...) The Future of Factor Investing [Alpha Architect]In this article, the authors expound on the importance of the factor “revolution” in finance. Factor investing has moved from a bedrock position to a future of innovation and disruption. With respect to factors the authors discuss where we have been and what can we look forward to. What are the(...) Economic growth and FX forward returns [SR SV]Economic growth differentials are plausible predictors of foreign exchange return trends because they are related to differences in monetary policy and return on investment. Suitable metrics for testing growth differentials as trading signals must replicate historic information states. Two types of(...) Video: Economic Data Analysis with Python Pandas (h/t @PyQuantNews) [Medallion Data Science]In this video kaggle grandmaster Rob Mulla takes you through an economic data analysis project with python pandas. We walk through the process of pulling down the data for different economic indicators, cleaning and joining the data. Using the Fred api you can pull up to date data and compare,(...) The Absorption Ratio: Measuring Financial Risk, Part 2 [Portfolio Optimizer]In the previous post, I reviewed the turbulence index, an indicator of financial market stress periods based on the Mahalanobis distance, introduced by Chow and al.1 and Kritzman and Li2. In this post, I will review the absorption ratio, a measure of financial market fragility based on principal(...) How Does Weighting Scheme Impacts Systematic Equity Portfolios? [Quantpedia]How often do you think about the weights of the assets in your portfolio? Do you weigh your assets equally, or do you prefer value-weighting? The researchers behind a recent research paper analyzed various weighting schemes and examined their effect on factor strategy return. They studied five(...) Betting Against Beta: New Insights [Alpha Architect]The 2014 study by Andrea Frazzini and Lasse Pedersen, “Betting Against Beta,” established strong support for low-beta (as well as low-volatility) strategies. The authors found that for U.S. stocks, the betting against beta (BAB) factor (a portfolio that holds low-beta assets leveraged to a beta(...) Random Forest on Financial Ratios as an Investment Strategy [Quant Dare]Random Forests are widely used Machine Learning algorithms. In finance, certain financial ratios are used to try and predict whether or not a company will outperform the market. Can we use the random forest on financial ratios to articulate an investment strategy which outperforms a buy and hold(...) Crypto Tokens and Crypto Coins: What Drives Performance? [Factor Research]Investors assume that token prices increase with product utilization in the token ecosystem However, the correlation between the token prices and token volumes has been zero Likely explained by token prices substantially being driven by speculation INTRODUCTION Much of the crypto world is, by(...) Inflation Deep Dive: An Examination of the Underlying BEA PCE Data [Light Finance]Inflation is perhaps the least well understood phenomenon in economics. Once said to be exclusively a monetary phenomenon, our current predicament is significantly more complicated and there is little consensus as to the root cause. Until recently the concern was that inflation would run permanently(...) Hacking 1-Minute Crypto Candlesticks: (2) Custom Charts using Plotly [Quant At Risk]A clear and informative time-series visualisation is often a challenge. Especially this is true when it comes to candlestick charts in Python. Searching the Web for a perfect solution may bring you to the Plotly package which stores in its arsenal the corresponding function allowing for easy(...) The Price of Transaction Costs [Quantpedia]Capturing the systematic premia is the main aim of many quantitative traders. However, investors tend to overlook an important factor when backtesting. Trading costs are an essential part of every trade, and yet even when we consider them, we often only use an approximation. The recent article from(...) Measuring uncertainty in time series data [Quant Dare]In financial time series it is very common to make predictions of single points such as expected future prices or returns. But is there any other way of adding more information in our forecasts? In today’s post we will be making probabilistic forecasts for time series data using recurrent neural(...) The Implementation Costs of Indexed ETFs [Alpha Architect]A common mistake made by many passive investors is that they view all index funds in the same asset class as “commodities(1)”, often considering only the expense ratio when making their investment choices. However, not all index funds are alike, and not all passively managed funds (what I refer(...) Can Market Maker Capital Constraints Result in Mispricing of ETFs? [Alpha Architect]In this research, the authors explore the role of financial intermediaries in contagion or comovements in pricing efficiency. Specifically, lead market makers (LMMs) like Goldman Sachs, Cantor Fitzgerald, RBC Capital Markets, and others, have funding constraints that may influence their ability to(...) Thematic Indices: Looking at the Past or the Future? [Factor Research]Thematic indices from MSCI have outperformed their benchmark since 2018 However, they have a rather unattractive factor mix Going against decades of research is not a sound investment strategy INTRODUCTION Although much of the future is uncertain, some technological innovations are rather certain.(...) Government Bonds Have Failed to Deliver When Needed [Allocate Smartly]Most government bond funds have suffered major losses this year. What is worse is that those major losses have come when they’re needed most, when stocks and other risk assets are also falling. During times of market stress, gov bonds tend to act as a counterbalance to risk assets, but so far this(...) The Turbulence Index: Measuring Financial Risk [Portfolio Optimizer]One of the challenges in portfolio management is the timely detection of financial market stress periods, typically characterized by an increase in volatility and a breakdown in asset correlations1. Chow and al.2 propose to detect such periods through the usage of the caste distance, a measure(...) How to use FX carry in trading strategies [SR SV]FX forward-implied carry is a valid basis for trading strategies because it is related to divergences in monetary and financial conditions. However, nominal carry is a cheap and rough indicator: related PnLs are highly seasonal, sensitive to global equity markets, and prone to large drawdowns.(...) Research Review | 15 April 2022 | Risk Factor Premia [Capital Spectator]A Look Under the Hood of Momentum Funds Ayelen Banegas and Carlo Rosa (Federal Reserve) February 2022 Momentum investing has surged over the past few years, with assets growing at three times the rate of conventional funds. Using a comprehensive dataset of US equity funds, this paper examines the(...) Trading and investing performance: year eight [Investment Idiocy]Eight years! Wow. In late 2013 I walked out of an office for the last time where I had been working for AHL, a large systematic futures trading fund. A few months later, in April 2014, I had my own very small systematic futures trading account, and I started doing these performance reviews. And this(...) Bond Investing in Inflationary Times [Alpha Architect]As the chief research officer of Buckingham Strategic Partners, the issue I am being asked to address most often is about fixed income strategies when yields are at historically low levels and inflation risk is heightened due to the unprecedented increase in money creation (through quantitative(...) Never Sell in May! [Financial Hacker]“Sell in May and go away” is an old stock trader’s wisdom. But in his TASC May 2022 article, Markos Katsanos examined that rule in detail and found that it should rather be “Sell in August and buy back in October”. Can trading be really this easy? Let’s have a look at the simple seasonal(...) What's the Best Factor for High Inflation Periods? - Part II [Quantpedia]This second article offers a different look at high inflation periods, which we already analyzed in What’s the Best Factor for High Inflation Periods? – Part I. In this second part, we look at factor performance during 10-year periods of high inflation. High Inflation Periods As we already(...) An Introduction to Stooq Pricing Data [Quant Start]In the previous article we learnt how to setup a prototyping environment for algorithmic trading using Jupyter Notebooks. We used Yahoo data with Pandas DataReader. In this article we will be looking at another free market data provider Stooq. If you would like to follow along with the tutorial and(...) What's the Best Factor for High Inflation Periods? - Part I [Quantpedia]In the past couple of weeks, we have done a few event studies, analyzing events that in one way or another resemble what is happening in the world today. At the beginning of March, we examined Factor Performance in Cold War Crises, and at the end of March, we brought you an article analyzing Nuclear(...) Trend Following & Factor Investing - Unexpected Cousins? [Factor Research]Trend following and beta-neutral factor investing are considered diversifying strategies However, since 2009 their correlations to stocks moved in tandem Both strategies had related performance drivers and risk exposures INTRODUCTION Asset classes seem easy to distinguish at first. For example,(...) Find Your Best Market to Trade With the Hurst Exponent [Raposa Trade]After five consecutive years of drought, Northern Californians welcomed the heavy rainfall in the winter of 2016-2017. By February, however, the rain had led many to worry about the integrity of the Lake Oroville Dam. Officials evacuated over 200,000 residents who lived downstream of the dam along(...) Shorting ETFs: A look into the ETF Loan Market [Alpha Architect]The growth of ETFs has been explosive (and we aren’t helping the matter via ETF Architect which facilitates low-cost high quality ETF white label services). At the end of 2020, there was roughly $5.4 trillion invested in ETFs in the United States, representing more than 25% of US market trading by(...) A Guide to Obtaining Time Series Datasets in Python (h/t @PyQuantNews) [Machine Learning Mastery]Datasets from real-world scenarios are important for building and testing machine learning models. You may just want to have some data to experiment with an algorithm. You may also want to evaluate your model by setting up a benchmark or determining its weaknesses using different sets of data.(...) Is Sector-neutrality in Factor Investing a Mistake? [Alpha Architect]Firm characteristics such as size, book-to-market ratio, profitability, and momentum have been found to be correlated with expected returns. The predictive power of these characteristics may stem from their industry component, their firm-specific component, or both. For example, while the study(...) Simple Machine Learning Models on OrderBook/PositionBook Features [Dekalog Blog]This post is about using OrderBook/PositionBook features as input to simple machine learning models after previous investigation into the relevance of such features. Due to the amount of training data available I decided to look only at a linear model and small neural networks (NN) with a single(...) Benford’s Law and Strategy Selection [Alvarez Quant Trading]While talking to a trader, he mentioned an article in the December 2021 issue of Technical Analysis of Stocks & Commodities about Benford’s Law. I had read the same article and was wondering how it could be applied to my trading. Benford’s Law is often used to look for fraud. I am sure I am(...) Transformers: is attention all we need in finance? Part II [Quant Dare]Using PyTorch to test the attention mechanism applied to time series forecasting. Introduction In the previous post we saw what Transformers are and how they work in its basic form. In this post we will develop one possible way to adapt the original design, which was created [1] to target NLP tasks,(...) Why 90% of Backtests Fail [Financial Hacker]About 9 out of 10 backtests produce wrong or misleading results. This is the number one reason why carefully developed algorithmic trading systems often fail in live trading. Even with out-of-sample data and even with cross-validation or walk-forward analysis, backtest results are often way off to(...) Optimize Your Trading Strategy With Python And The Kelly Criterion [Raposa Trade]Retail traders almost always have small trading accounts. To get the returns they're after, traders frequently take on leverage - often times imprudent amounts in highly levered FOREX accounts that can be levered 50-100x! Retail equity brokers are a bit more conservative with maximum leverage(...) Gaining an Edge via Textual Analysis of FOMC Meetings [Alpha Architect]How investors understand and use central bank communications, aka FEDSPEAK, is oftentimes cryptic and difficult to analyze. This study attempts to provide some clarity to this issue by applying textual analysis to both high-frequency price and communication data, to focus on episodes whereby stock(...) Factor Olympics Q1 2022 [Factor Research]Factor volatility was low despite the significant geopolitical and economic turmoil in Q1 2022 Value is the clear winner with double-digit gains Quality stocks underperformed, but only moderately INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10(...) Equity convexity and gamma strategies [SR SV]Equity convexity means that a stock outperforms in times of large upward or downward movements of the broad market: its elasticity to the market return is curved upward. Gamma is a measure of that convexity. All else equal, positive gamma is attractive, as a stock would outperform in market rallies(...) Mean-Variance Optimization: Well Diversified (Near) Efficient Portfolios [Portfolio Optimizer]One well-known stylized fact of the Markowitz’s mean-variance framework is that, irrespective of the quality of the estimates of asset returns and (co)variances, efficient portfolios are concentrated in a very few assets1. From a practitioner’s perspective, this has always been a problem12. In(...) Nuclear Threats and Factor Performance - Takeaway for Russia-Ukraine Conflict [Quantpedia]The Russian invasion of Ukraine and its repercussions continue to occupy front pages all around the world. The battle situation is very dynamic, but it seems that Ukraine holds ground very well and is even able to execute strong local counter-offensives against Russian forces. That’s definitely(...) Are Stock Market Bubbles Identifiable? [Alpha Architect]We can define an investment bubble as an irrational strong price increase—implying a predictable strong decline. The efficient market hypothesis (EMH) implies both the absence of bubbles and that the future return is unpredictable. In his Nobel Prize lecture, the father of the EMH, Eugene Fama(...) Yield Curve Inversions and SPX Returns [Quantifiable Edges]There has been a lot of talk recently about yield curve inversions and whether that means a recession is on the way, and how soon? And if there is a recession, will there also be a bear market? I decided to forget about economic forecast and just look at how the SPX did after a curve inversion. I(...) Mutual Fund Returns vs Investor Returns [Quant Dare]It is well known that we investors are full of biases when making investment decisions (loss-aversion, trend-chasing, …), but what is the real impact of these biases on our performance? In this post we will try to answer this question quantitatively, and we will also compare the average investor(...) Which Articles Should You Read on SeekingAlpha.com? [Alpha Architect]One of the most established tenets in social psychology science states, “When considering what content to share in their social interactions, people primarily contemplate what impressions their sharing could create among receivers and whether those impressions are consistent with who they are or(...) Building a Diversified Portfolio for the Long-Term [Factor Research]Most diversifying strategies fail to provide diversification benefits when most needed We build a diversified portfolio via trend, multi-factor, and long volatility An equal-weighted approach to asset allocation is not worse than more complex approaches INTRODUCTION At FactorResearch, we have(...) Positive $SPX Seasonality After the 4th Friday in March [Quantifiable Edges]There are some bullish forces kicking in the next few weeks. For one, the week after the 4th Friday in March has been a strong one over the last 24 years. (Not as much before that.) We can see this in the study below, which I showed in this weekend’s subscriber letter. Positive SPX seasonality(...) Using requests and BeautifulSoup in Python to scrape data [Wrighters.io]The amount of data available on the internet is quite staggering. It is often quite easy to do a quick search and click through to view data on a website. However, if you want to actually use that data in your analysis, you have to be able to fetch it and convert it into a format that is usable. The(...) Top N Crypto-Assets by MarketCap for Backtesting Purposes in Python [Quant at Risk]A quantitative research over the construction of a perfect crypto-portfolio can be based on a number of crypto-assets. The selection of them is of paramount importance. If you are able to build the right portfolio, stick to it, or successfully manage its composition in time (e.g. through the method(...)