Shiller’s (1998) original CAPE ratio (the cyclically adjusted price of an equity index/10 year average of real earnings) used to predict long term equity returns, like every online recipe, has been improved over the years by various reviewers. A number of substitutes for real earnings have been

Defined outcome ETFs have quickly gathered almost $5 billion in assets Not unexpected given their much lower drawdowns when the market crashed in March 2020 However, they are complex and expensive products and there are viable alternatives INTRODUCTION If ETFs had an arch enemy, then it probably

Resurrecting the Value Premium David Blitz (Robeco) and Matthias X. Hanauer (Technische Universität München) October 15, 2020 The prolonged poor performance of the value factor has led to doubts about whether the value premium still exists. Some have noted that the observed returns still fall

We decided to allow anyone to take advantage of some tools we constantly use at NAVA Capital. Investors and financial managers often need to perform similar tasks, like analyzing financial time series, comparing two investments, adjusting gross performance by management fees, performance fess and so

Continuing on with the subject matter of my last post, in the code box below there is R code which is a straight forward refactoring of the Octave code contained in the second code box of my last post. This code is my implementation of the cross validation routine described in the paper Cluster

In our last post, we took our analysis of rolling average pairwise correlations on the constituents of the XLI ETF one step further by applying kernel regressions to the data and comparing those results with linear regressions. Using a cross-validation approach to analyze prediction error and

Bloomberg has an article You May Regret Staying Parked in U.S. Stocks which made the case that there’s "widespread agreement" and "the answer isn’t in dispute" that foreign stocks will outperform going forward. Simplified version of my view of that statement.... c'mon

Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at least for a short period of time. Initial research on momentum was published by Narasimhan Jegadeesh and Sheridan Titman, authors of the 1993 study

I am happy to announce that I will be hosting a free webinar series on quantitative analysis and algorithmic trading. Dates and times for the first shows can be found over here: Tradesignal Webinar Series Date and Time based patterns will be the topic of the first webinar. It will focus on the

This post contains affiliate links. An affiliate link means CSSA may receive compensation if you make a purchase through the link, without any extra cost to you. CSSA strives to promote only products and services which provide value to my business and those which I believe could help you, the

In the last post I reviewed the Momentum Trading Strategies Course by Quantra (a division of QuantInsti) which I reviewed as part of a recent educational journey to improve my quantitative skill set. The next course that I will be reviewing is Mean-Reversion Strategies in Python which is taught by

I’ve been sitting here for 5 mins trying to come up with a witty intro for this episode about momentum, but I just couldn’t seem to get it going, so…

This post is a BONUS LESSON taken directly from Zero to Robot Master Bootcamp. In this Bootcamp, we teach traders how to research, build and trade a portfolio of 3 strategies including an Intraday FX Strategy, a Risk Premia Strategy and a Volatility Basis Strategy. If you’re interested in adding

Monday saw a massive market rotation. It could be noted by the performance in the IWM vs the QQQ, or in looking at performance among S&P 500 sectors, where Energy beat Technology by 15% on Monday. But to really see how strong the rotation was, you’d need to take a look at individual stock

Do analysts actively exploit anomalies when they recommend stocks? Do analysts’ research efforts contribute to efficiency in the equity markets? Good questions. This research clarifies the relationship between established stock return anomalies and analyst recommendations. Given that anomalies are

Further to my previous post, below is an extended version of the "blurred_maxshift_1d_linear" function. This updated version has two extra outputs: a vector of the cluster centre index ix values and a vector the same length as the input data with the cluster centres to which each datum has

The long-term track record of equity market neutral hedge funds is attractive, but should be viewed with scepticism due to Madoff and survivorship bias Only one index from HFRX seems sound, but his highlights negative alpha since the GFC and positive returns primarily from market beta A factor

After losing 5.6% this in the week ending 10/30/20, the S&P 500 completely reversed the losses this past week with a 7.3% gain. That is a fairly remarkable turnaround. Below is a look at all other times the S&P 500 lost 5% or more one week, and then made up for the losses and more the next

Recent academic papers illustrate how macroeconomic data support predictions of energy market flows and prices. Valid macro indicators include shipping costs, industrial production measures, non-energy industrial commodity prices, transportation data, weather data, financial conditions indices, and

As we test more and more strategies the overall probability of choosing at least one poor strategy grows. So we must be very careful with how many backtests we run. We should always record all of them, to later deflate the Sharpe Ratio accordingly. In this post, we are going to analyze how the

In virtually all studies on asset pricing and asset pricing models, the one-month Treasury bill is the choice as the risk-free rate. In his study “The Risk-Free Asset Implied by the Market: Medium-Term Bonds instead of Short-Term Bills,” published in the September 2020 issue of The Journal of

Quantopian announced that it is shutting down its community platform. This doesn’t entirely come as a surprise. Quantopian returned money to investors earlier this year after its investment strategy underperformed. It shut down paper trading in 2019 (having already ended live trading in 2017),

Remember the handcrafting method, which I described in this series of posts? Motivating portfolio construction Methodology Implementing Testing Adjusting portfolio weights for Sharpe Ratios All very nice, all very theoretically grounded, except for one thing: the 'candidate matrices'.

Zombie stocks are a diverse group, both from a country and sector perspective Zombie stocks were fundamentally riskier, yet outperformed non-zombie stocks over the last year Oddly, investors need to pay up as they are also more expensive INTRODUCTION Walking through financial centers like London or

I recently listened to a podcast about one of the earliest human civilizations – the ancient Sumerians. Apparently, our system of minutes, hours, and days has been with us since the time of these ancient people, who developed it based on a simple base-12 counting system: There are three joints in

This paper complements Doeswijk, Lam, and Swinkels’ 2014 paper, which documents the historical composition of the market portfolio. Doeswijk, Lam, and Swinkel stopped their research in building the “market portfolio,” but left the work of the market portfolios historical returns undone. In

I’ve been thinking about valuations a lot lately. If you’ve been following the stock market in recent months, then you will doubtlessly be aware that the past 6-months have witnessed a historic 44% rally across global markets. This rally has drawn particular attention because it has been

Wes Gray after serving as a Captain in the United States Marine Corps earned an MBA and a PhD in the finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. He worked as a finance professor at Drexel University. He then found Alpha Architect — a

One of the most common problem encountered by all novice researches of the crypto-markets and (algo-)traders is knowing a list of all cryptocurrency pairs being actively traded at specific crypto exchange. This knowledge is a gateway to a vast research over correlations of crypto-assets, looking for

Fundamental trend following uses moving averages of past fundamental data, such as valuation metrics or economic indicators, to predict future fundamentals, analogously to the conventions in price or return trend following. A recent paper shows that fundamental trend following can be applied to

The 1997 publication of Mark Carhart’s paper “On Persistence in Mutual Fund Performance” led to the four-factor model, which added momentum to market beta, size, and value, becoming the workhorse model in finance—replacing the Fama-French three-factor model. The next major contribution came

This post contains affiliate links. An affiliate link means CSSA may receive compensation if you make a purchase through the link, without any extra cost to you. CSSA strives to promote only products and services which provide value to my business and those which I believe could help you, the

As some may know, on October 29th, Quantopian users received notification the company would be terminating its free community platform on November 14th, leaving users with two weeks to download their code and find another home. We understand this closure has come suddenly, leaving many quants

I was very sad to learn that Quantopian is shutting down its community services. Quantopian’s efforts to bring quant finance outside of institutions was a genuine game-changer. The educational content was solid, the tech was excellent, and the QuantCon conferences were professional, well-run, and

You’ve probably noticed that there’s a US election on the horizon. This is an event of known uncertainty: a “known unknown” in the now immortal language of Donald Rumsfeld. In trading, we sometimes observe marginal pricing inefficiencies around these “known unknowns”. For example, ahead

Recently, I have been working on a strategy that trades stocks with low dollar turnover. The initial performance was attractive and I was liking the strategy. But there were two issues that I needed to deal with in the backtesting. How much slippage to add to these stocks. The strategy enters and

When you are in front of a complex classification problem, often the case with financial markets, different approaches may appear while searching for a solution. These systems can estimate the classification and sometimes none of them is better than the rest. In this case, a reasonable choice is to

There are many ways to use momentum. Some are better than others. Let us look at some of the best approaches. Stock Momentum In 2018, Dimensional Fund Advisors (DFA) issued a report on the performance of all public momentum funds from June 2003 through 2017. Only one fund had outperformed the

In our last post, we looked at a rolling average of pairwise correlations for the constituents of XLI, an ETF that tracks the industrials sector of the S&P 500. We found that spikes in the three-month average coincided with declines in the underlying index. There was some graphical evidence of a

The popularity of using volatility to inform portfolio strategies has grown as the research tying volatility-managed techniques and improved risk/return portfolio performance has proliferated in the literature. The portfolios examined in the empirical literature generally utilize conservative

Hi all, and welcome back to the site – I appreciate it has been an unexpectedly long time since I last posted…in fact my last post was around this time last year. Hopefully I can get back on the “treadmill” and churn out some articles at a somewhat faster rate than 1 a year over the next

The two basic rules of asset allocation are: i) identify assets with positive expected payoffs, and ii) ensure that the assets are not too highly correlated, so that diversification benefits can be harvested. Although the rules are simple, implementation is often complex. Equities have a positive

The performance of stock market indices varies between different countries. Market-to-market and stock-to-stock correlations tend to get high during downturns[5], but differ considerably during other, more peaceful market environments. MSCI, a financial market data company, offers great quality data

ArbitrageLab is a python library that helps traders who want to exploit mean-reverting portfolios by providing a complete set of algorithms from the best academic journals. How to Get Access Recently there has been a lot of interest in the development of our most recent library which focuses

Carry across asset classes has not performed strongly over the most recent decade Currency carry and Value & Size equity factors exhibited the same trends in performance since 1999 All three factors are likely driven by risk sentiment, essentially offering the same risk exposure INTRODUCTION

Recently a reader contacted me with a view to collaborating on some work regarding the Delta phenomenon but after a brief exchange of e-mails this seems to have petered out. However, for my part, the work I have done has opened a few new avenues of investigation and this post is about one of them.

Discriminating random variables on time-series on both their distribution and dependence information is motivated by the study of financial assets returns. For example, given two assets where their returns are perfectly correlated, are these returns always similar from a risk perspective? According

Prospect theory value is a valid investment factor, particularly in episodes of apparent market inefficiency. Prospect theory is a popular model of irrational decision making. It emphasizes a realistic mental representation of expected gains and losses and an individual’s evaluation of such

The Quant Conference Digital engages the foremost thought leaders from the industry and academia to dive into the latest innovations in quant finance, foster collaboration and facilitate opportunities. Series of panel discussions and keynotes offer an in-depth exploration of the challenges and

Our own research paper ESG Scores and Price Momentum Are More Than Compatible utilized the Knapsack problem to make the ESG strategies more profitable or Momentum strategies significantly less risky. The implementation of the Knapsack problem was created in R, using slightly modified Simulated