Running regressions on past returns is a great tool for academic researchers who understand this approach’s nuance, assumptions, pitfalls, and limitations. However, when factor regressions become part of a sales effort and/or are put in the hands of investors/advisors/DIYers, “the tool can

In a multi-asset portfolio, it is usual that some assets have shorter return histories than others1. Problem is, the presence of assets whose return histories differ in length makes it nearly impossible to use standard portfolio analysis and optimization methods… Estimating the historical

It’s just too easy to do all the volatility measures, with quantmod (well, with TTR actually). Let’s skip all the preliminaries and have a look. And, a Pearson pairs table: C2C Parkinson Rogers-Satchell Garman-Klass,Yang-Zhang C2C 1.0000000 0.4395541 0.2619220 0.3573710 Parkinson 0.4395541

I first learned about this algorithm in the book Kernel Adaptive Filter: A Comprehensive Introduction1 sometime in 2012 or 2013. This book goes in depth into how to build kernel filters and does a fantastic job of easing you into the mathematics. I highly recommend having a read if you can. In my

Reinforcement Learning for Credit Index Option Hedging – Francesco Mandelli, Marco Pinciroli, Michele Trapletti, Edoardo Vittori In this paper, we focus on finding the optimal hedging strategy of a credit index option using reinforcement learning. We take a practical approach, where the focus is

Betting on War? Oil Prices, Stock Returns and Extreme Geopolitical Events Knut Nygaard (Oslo Metropolitan U.) and L.Q. Sørensen (Storebrand Asset Mgt.) July 2023 We show that the ability of oil price changes to predict stock returns is largely limited to five extreme geopolitical events: the 2022

My August 4, 2022, Alpha Architect article examined the research demonstrating that cross-sectional momentum has provided a premium that has been found to be persistent across time and economic regimes, pervasive around the globe and across sectors and asset classes (stocks, bonds, commodities and

Everybody knows what volatility is. But there’s more than one way to measure it. The last couple of posts I’ve been trying to document a little more about the plain vanilla standard way to measure vol in the context of my efforts toward finding an ETF switching strategy to use realized

This study explores the degree to which fund concentration as measured by high tracking error or active share, affects the magnitude of excess returns and whether or not the likelihood of outperformance or underperformance are distributed similarly. Three methods of analysis were used to examine the

There is grave danger in tying your strategy to one selected set of parameters, particularly if those parameters are cherry picked to give more exciting results than other possible choices. I’m trying to working to avoid that in quant_rv. So far, quant_rv has two main parameters that can vary: the

Financial Machine Learning – Bryan T. Kelly, Dacheng Xiu We survey the nascent literature on machine learning in the study of financial markets. We highlight the best examples of what this line of research has to offer and recommend promising directions for future research. This survey is designed

While sustainable investing continues to gain in popularity, economic theory suggests that if a large enough proportion of investors choose to favor companies with high sustainability ratings and avoid those with low sustainability ratings (sin businesses), the favored company’s share prices will

An empirical analysis of the U.S. bond market since the 1960s emphasizes occasional abrupt regime changes, as defined by yield levels, curve slopes, and related volatility metrics. An arbitrage-free bond pricing model illustrates that bond risk premia can be decomposed into two types. One is related

Should investors prefer companies with high profit margins or companies with improving profit margins? Is it better to own an unprofitable company that's getting better, or a profitable company that's getting worse? This post explores these questions by analyzing the profitability growth

Using the input data as described in Quantitative And Machine Learning Asset Analysis: Single Moving Average (SMA) – (current price – N day average)/N day average, where N = 21, 42, 63, …, 231, 252, formed into an array. Dual Moving Average (DMA) – Same as SMA with 21 day average substituted

The conventional wisdom suggests that by spreading your investments across a wide range of assets, you can mitigate risk and achieve greater long returns. In this article, we will explore the diversification benefits of conglomerate stocks and why they can be valuable additions to a stock portfolio.

This blog post serves as a summary and exploration of ~100 papers, providing insights into the key trends presented at ICML 2023. The papers can be categorized into several sub-fields, including Graph Neural Networks and Transformers, Large Language Models, Optimal Transport, Time Series Analysis,

Covered call strategies aim to offer index-like returns with lower volatility and higher yields They have underperformed their benchmarks significantly over longer periods They are tools for market timing, but that is difficult to execute successfully INTRODUCTION JP Morgan has been a late-comer to

In time-series analysis we often examine signals for specific volatility patterns. The simplest one is a periodic or quasi-periodic modulation. In finance these modulations are of paramount importance allowing for signal decomposition, separating short-term variations from long-term trends.

Value as an investment strategy has long been popular in both academia and among practitioners and is supported by valuation theory, which provides a framework for identifying the drivers of expected returns: the prices investors pay and the expected future cash flows investors will receive.

In the research report Random rotations and multivariate normal simulation1, Robert Wedderburn introduced an algorithm to simulate i.i.d. samples from a multivariate normal (Gaussian) distribution when the desired sample mean vector and sample covariance matrix are known in advance2. Wedderburn

For v1.2.0 we take a step back from 1.1.0 to meet some of the new goal requirements right off the bat, and to play explore. In particular, we remove the code to test QQQ (or other ETFs) and related vars. Next we change code to make it easy to explore parameters (like the volatility threshold) to see

So we need some starter code, and some goals for where we’re going. The starter code comes from a blog post by Learning Machines back in April 2023. He’s got some great stuff on his blog (we’ll use some of his ideas here), so take a good look through his Quantitative Finance category, at

The Forex Market is the global marketplace where currencies are bought and sold. It is the largest and most liquid financial market in the world, with trillions of dollars traded daily. A currency pair is an asset composed of two currencies traded on the financial market. Its price represents the

This blog post serves as a summary and exploration of ~100 papers, providing insights into the key trends presented at ICML 2023. The papers can be categorized into several sub-fields, including Graph Neural Networks and Transformers, Large Language Models, Optimal Transport, Time Series Analysis,

All popular factors generated negative excess returns in 1H 2023 Small caps performed best, low-risk stocks worst Somewhat surprisingly, long-short multi-factor products produced positive returns INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10

Executing a live trading strategy can be a daunting task. From analyzing market data and identifying trading signals to deploying and monitoring trades in real-time, the process requires precision, speed, and accuracy. Fortunately, advancements in technology have paved the way for innovative

Effect J. González 28/06/2023 No Comments In a previous post we saw how avoiding being in the market during Earnings publications could be a zero-sum game in the long run. In this post our purpose is to study if it is possible to take advantage of the effect in the stock prices based on the

Since the discovery of the size, value, and momentum effects in the 1980s and 1990s, a plethora of other factors have been identified in the asset pricing literature, which led John Cochrane to coin the phrase “zoo of factors.” It has raised questions and led to research into how many factors

How does a company's profitability affect its stock returns? In this post, I use Alphalens, a Python library for analyzing alpha factors, to investigate the relationship between operating margin, a profitability ratio, and future returns. This is the second post in the fundamental factors

In the previous article we wrote a Python function which utilised the Polygon API to extract a month of minutely data for both a major (EURUSD) and exotic (MZXZAR) FX pair. We plotted the returns series and looked at some of the issues that can occur when working with this type of data. This article

Developments in the use of Large Language Models (LLM) have successfully demonstrated a set of applications across a number of “domains”, most of which deal with a very wide range of topics. While the experimentation has elicited lively participation from the public, the applications have been

The rapid evolution of language models has the potential to revolutionise financial analysis GPT outperformed when analyzing earnings calls, followed by Word2Vec and BERT However, overall models should be selected carefully as each has its pros and cons ABSTRACT This paper aims to evaluate the

In the previous article of the main series, we looked at robustly tracking our trading inventory and built an Inventory component for our Quant Infrastructure. In this article, we look at tracking and managing orders and build an OrderExecutor for this purpose. Orders require a different approach

Abstract: The “Intangible Value Factor” (IHML) can play an additive role in factor portfolios alongside the established market, size, value, quality, and momentum factors. This Six-Factor Model avoids the problematic “anti-innovation” bias of traditional factor portfolios and can be easily

The Realized Information Ratio and the Cross-Section of Expected Stock Returns Mehran Azimi (University of Massachusetts Boston) January 2023 This study investigates the predictability of asset returns with the information ratio and its specific variant, the Sharpe ratio. We find that the realized

The article aims to explore the possibility that changes in fundamentals play a role in the attenuation of stock market anomalies, offering an alternative explanation to the prevailing arbitrage-based explanation. Can the changes in fundamentals explain the attenuation of anomalies? Choi, Lewis and

So, thanks to my former boss, and head of direct indexing at BNY Mellon, Vijay Vaidyanathan, and his Coursera course, along with the usual assistance from chatGPT (I officially see it as a pseudo programming language), I have some more software for the Python community now released to my github. As

In crypto market, stablecoins are meant to maintain their constant value with respect to the underlying currency. At least in theory. The problem begins with an idea of stablecoin’s value to be stable or being stabilised over time. Different backup mechanisms are at work. For example, Tether

There is a huge number of ways how one can transform financial times-series in order to discover new information about changing price dynamics. We talk here about certain transformation that takes price time-series (or return-series) and transforms it into a new domain. Every solid textbook on

In Return StackingTM: Strategies for Overcoming a Low Return Environment, we advocated for the addition of managed futures to traditionally allocated portfolios. We argued that managed futures’ low empirical correlation to both equities and bonds and its historically positive average returns makes

There are several significant, well-documented benefits of index funds. In addition to outperforming a large majority of actively managed funds, they tend to have low fees, low turnover (resulting in low trading costs and high tax efficiency), broad diversification, high liquidity, and near-zero

Local-currency import growth is a widely underestimated and important indicator of trends in fixed-income markets. Its predictive power reflects its alignment with economic trends that matter for monetary policy: domestic demand, inflation, and effective currency dynamics. Empirical evidence

Preferred income funds offer exceptionally high yields However, the higher the yield, the lower the total return The diversification benefits of these funds were limited INTRODUCTION Although the job of a stock analyst is not easy, fixed-income analysts have it arguably harder. Sure, there might be

Many factor investors are familiar with “small-cap value investing,” which is a reasonable allocation for long-term investors who can tolerate a lot of volatility. Why are there so many small-cap value investors? Small-cap value investors have been told that the value premium is higher, on

When researching fundamental factors, analyzing alpha shouldn't be your first step. You can save time and spot issues early by starting with a basic exploration of your factor's distribution and statistical properties, a process known as exploratory data analysis (EDA). This post looks at

In my post Linking Impact in Divergence Attribution I explained the need to use linking algorithms in order to aggregate single-period returns. I ended my exposition by setting out the formula for adjusted returns using Andrew Frongello’s algorithms (arguably the ones with best qualities in the

As a portfolio manager, of a mutual or dedicated fund, you have to regularly report the performance of your fund on a specific time frame (monthly, quarterly, yearly, etc.). One of the common tools is the performance attribution analysis, which is a framework that allows to isolate the effect

Momentum strategies have been popular since the original Jagadeesh and Titman article was published in 1993. Variations on the strategies have employed calculating momentum on an individual and industry basis. For instance, in a 1999 study, Moskowitz and Grinblatt produced a positive and significant

This week is options expiration week. And we have known for a long time that opex is often a bullish week for the market. Interestingly, that seasonal tendency has not seemed to hold true since the COVID crash in 2020. Below is a look at performance of all opex weeks since 1984. Opex week