Quant Mashup Econometric GDP Models Struggle With Coronavirus Fallout [Capital Spectator]The widespread disruption from the coronavirus pandemic is obvious to everyone, but economic nowcasting and forecasting models are only just beginning to reflect the damage to what had been a moderately expanding US economy. Thanks to the lag in economic data, which can arrive with as long as two to(...) OCR for financial documents (h/t @PyQuantNews) [Nanonets]If you have a relative working in the banking industry, ask the person what annoys him/her most about the job. You will surely receive an answer that is related to the task of data entry i.e. the practice of manually entering serial numbers and names from financial documents into the bank’s(...) Is There Something Wrong with the Value Premium? [Alpha Architect]The dramatic underperformance of the value premium since 2018, among the largest drawdowns in history, has led many to question its existence. It is certainly possible that what economists call a “regime change” could cause assumptions for why the premium should exist/persist to have changed.(...) YTD Performance of Equity Factors [Quantpedia]Actual situation on financial markets changes extremely fast. At the time we are writing this blog post (Monday morning at 23rd of March) we have End-of-Day data to Friday’s close (20th of March) and a few hours of trading action from Monday and VIX currently stands over 70. Markets are in(...) Managing Expectations By Simulating S&P 500 Drawdowns [Capital Spectator]The US stock market tumbled again yesterday, falling to a 3-1/2-year low, thanks to expanding coronavirus threat. The economic outlook is grim, at least for the near term, and so the market is attempting to price in this stark change. The result, not surprisingly, is a sobering, rapid fall from(...) Where Tactical Asset Allocation Stands Now (Monday 03/23) [Allocate Smartly]Tactical Asset Allocation (TAA) as a whole continues to weather the fallout well, significantly paring down losses versus a conventional buy & hold portfolio. Individual strategies vary widely. We track 50+ published TAA strategies, allowing us to draw some broad conclusions about TAA as a(...) What the Trend [Flirting with Models]In this research note, we explore the performance of simple trend equity strategies and funds in the recent market rout. We find a significant dispersion in realized performance, with some strategies shifting entirely to cash at the end of February and some remaining entirely invested. We explain(...) Markov Model - An Introduction [Quant Insti]In this post, we will learn about Markov Model and review two of the best known Markov Models namely the Markov Chains, which serves as a basis for understanding the Markov Models and the Hidden Markov Model (HMM) that has been widely studied for multiple purposes in the field of forecasting and(...) Thematic Investing: Thematically Wrong? [Factor Research]Thematic investing can be viewed as performance chasing with a narrative A systematic approach to thematic investing would have underperformed the stock market Thematic hedge fund managers have not generated attractive returns PERFORMANCE CHASING WITH A NARRATIVE? Thematic investing is like venture(...) Calculating a VIX6M Style Index back to 1990 Reveals Some Volatility Trends [Six Figure Investing]The Cboe’s VIX®, VIX3Msm (93-day), and VIX6Msm (184-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 in the case of VIX3M and January 2008 for VIX6M. This post introduces the(...) What we have been reading to stay calm [Two Centuries Investments]This crisis is bringing out the best in many people. When the stakes become real, alertness is heightened, thinking is crystallized. Here is an eclectic collection of thought pieces we’ve enjoyed over the past two weeks. Bin There Done That by Morgan Stanley Ample research shows that most experts(...) Rebalancing history [OSM]Our last post on rebalancing struck an equivocal note. We ran a thousand simulations using historical averages across different rebalancing regimes to test whether rebalancing produced better absolute or risk-adjusted returns. The results suggested it did not. But we noted many problems with the(...) How loss aversion increases market volatility and predicts returns [SR SV]Loss aversion means that people are more sensitive to losses than to gains. This asymmetry is backed by ample experimental evidence. Loss aversion is not the same as risk aversion, because the aversion is disproportionate towards drawdowns below a threshold. Importantly, loss aversion implies that(...) Is robustness an ally? [Quant Dare]Many investment strategies use the mean like an official parameter. However, this estimator can be considered non-robust, being easily affected by outliers. But if we take a look at almost any financial series, we will notice that outliers may appear more often than we might think. Introduction In(...) Risk Parity in the Time of COVID [Invest Resolve]Consistent with misapprehensions expressed during other recent market crises, there has been a chorus of alarmist speculation about the actions and state of risk-parity strategies during the current crash. We felt it would be helpful to revisit the concept of risk parity and take a snapshot of how a(...) The Use and Value of Financial Advice for Retirement Planning: Part 1/2 [Alpha Architect]What are the Research Questions? Planning for the expenditures needed to fund a successful retirement is one of the most important tasks individuals face, and it’s not an easy one. In fact, it is pretty common (and smart) for some investors to turn to a professional advisor to help guide them(...) Tactical Strategies and The Anatomy of A Bear Market [Invest Resolve]The last few weeks have been some of the toughest in recent memory for investors, as we have observed an intense global market selloff that began in late February and continued into early March of 2020 (as of the writing of this report). Equity markets have experienced the steepest losses since(...) Bitcoin in a Time of Financial Crisis [Quantpedia]This is the article we had prepared around 1-2 weeks ago (data sample starts in October 2014 and ends on 4th of March 2020). But then coronavirus hit our country (Slovak Republic), and we were doing a lot of crisis management tasks and therefore were not able to publish it on time. Now, after the(...) Vortex Indicator: Trading Strategy Review & Sensitivity Test [Oxford Capital]Developer: Etienne Botes and Douglas Siepman. Source: The Vortex Indicator. Stocks & Commodities, January 2010. Concept: Momentum trading strategy based on Vortex Indicator. Research Goal: Performance verification of momentum signals. Specification: Table 1. Results: Figure 1-2. Trade Setup:(...) EM Debt: To Hold, or Not To Hold? [Factor Research]Hard currency emerging market debt outperformed local currency EM debt since 2013 EM government and corporate debt traded comparably Adding EM debt to a traditional US equity-bond portfolio would have generated only marginal benefits INTRODUCTION Forecasting the short-term outlook for the S&P(...) Petra on Programming: The Smoothed OBV [Financial Hacker]In his article in the S&C April 2020 issue, Vitali Apirine proposed a modified On Balance Volume indicator (OBVM). The hope was that OBVM crossovers and divergences make great trade signals, especially for stock indices. I got the job to put that to the test. The original OBV indicator was(...) Speeding up your Python code [R Trader]I know this topic is addressed on a very regular basis on the web but I’m pretty sure sharing my experience will help some finance people. I’m currently working on Limit Order Book modeling. This means dealing with fairly big data sets. I have around 1 million observations per stock and per day.(...) Rebalancing ruminations [OSM]Back in the rebalancing saddle! In our last post on rebalancing, we analyzed whether rebalancing over different periods would have any effect on mean or risk-adjusted returns for our three (equal, naive, and risky) portfolios. We found little evidence that returns were much different whether we(...) Low Volatility-Momentum Versus Value-Momentum Factor Portfolios [Alpha Architect]If an investor would state today that in ten or twenty years most portfolios would include an allocation to cryptocurrencies, they would likely be laughed at. However, a similar response would have been encountered in the Internet Bubble and someone proposed to invest in low-risk stocks. During that(...) Where Tactical Asset Allocation Stands Now (Thursday 03/12) [Allocate Smartly]Broadly speaking, Tactical Asset Allocation has weathered this storm reasonably well, but the last two days have been tough and we are by no means out of the woods. We track 50+ published TAA strategies, allowing us to draw some broad conclusions about TAA as a style. In the table below we show the(...) A Vector Autoregression Trading Model [Robot Wealth]The vector autoregression (VAR) framework is common in econometrics for modelling correlated variables with bi-directional relationships and feedback loops. If you google “vector autoregression” you’ll find all sorts of academic papers related to modelling the effects of monetary and fiscal(...) Do Insider Trades Provide Insights into Future Returns? [Alpha Architect]The volume of work that has been done on insider transactions is not inconsequential, we’ve covered a variety of research on the topic in several blog posts just a few of which are here and here. This is the first time we observe corporate insider’s ability to overcome biases as an indicator of(...) Trading Multiple Strategies [Alvarez Quant Trading]Using strategy diversification is one of the easiest ways to improve the performance and reduce risk of your overall portfolio. Trading one strategy is risky because you never know when it may stop working or simply go into a period of under-performance. Given two strategies to trade, the questions(...) What to Do When Alpha Becomes Beta [Alpha Architect]In this article, the author argues that alternative risk premia (ARP) strategies undergo an evolution that begins with their inception as a pure alpha -based strategy, continuing its metamorphosis into a pure beta strategy. The inevitable transformation is brought on by a number of factors and also(...) Build a Trading System using Statistical Methods [Milton FMR]Most trading systems utilize indicators as a method of trading strategy design. But before building a trading system using indicators one should ask what do they indicate? The answer to that is that most of the time they are not indicating any information that can be advantageous in building a(...) Where Tactical Asset Allocation Stands Now (Monday 03/09) [Allocate Smartly]We’ve fielded a lot of questions this morning about how Tactical Asset Allocation is faring this month. We track 50+ published strategies, so we’re able to draw some broad conclusions about the current state of TAA. Generally speaking, all is well. Individual strategies vary, but as a whole, TAA(...) Building and Regularizing Linear Regression Models in Scikit-learn [Quant Insti]In the last blog, we examined the steps to train and optimize a classification model in scikit learn. In this blog, we bring our focus to linear regression models. We will discuss the concept of regularization, its examples(Ridge, Lasso and Elastic Net regularizations) and how they can be(...) Why Trend Models Diverge [Flirting with Models]During the week of February 23rd, the S&P 500 fell more than 10%. After a prolonged bullish period in equities, this tumultuous decline caused many trend-following signals to turn negative. As we would expect, short-term signals across a variety of models turned negative. However, we also saw(...) Big Gaps Down In Already Bad Markets [Quantifiable Edges]SPX futures are locked limit down 5% as I write this Sunday night. The small study below looks at all other times 1) SPY was already short-term oversold (closed at a 5-day low), and 2) gapped down at least 3%, and 3) opened below the lowest close of the previous 50 days. Below is the full list of(...) The Secret to Shorting Stocks [Black Arbs]Misinformation is everywhere. Many people believe the key to successful short selling is simply the inversion of a successful long strategy. I also used to believe this, among other short selling myths before I took the Short Selling Course by Laurent Bernut ( This article will demonstrate the(...) Lagged correlation between asset prices [SR SV]Efficient market theory assumes that all market prices incorporate all information at the same time. Realistically, different market segments focus on different news flows, depending on the nature of the traded security and their research capacity. Such specialization makes it plausible that lagged(...) The Stay Rich Portfolio [Meb Faber]Welcome to the second installment of our new series on generating wealth, preserving it, and then looking at a real-world illustration of strategically implementing these concepts. In our first essay, we discussed generating riches through a high-paying career, investing in public and private(...) The Gap Between Large and Small Companies is Growing. Why? [Alpha Architect]In my role as chief research officer for the Buckingham Family of Financial Services, I receive many questions from investors and advisors alike, asking me to address concerns they have that originate from articles they have read or statements they hear on the financial media. I thought it worth(...) How much risk should we take? [Investment Idiocy]This is the second of three posts aimed at answering three fundamental questions in trading: How should we control risk (previous post) How much risk should we take? (this post) How fast should we trade? (TBC) These questions are extremely important, IMHO much more important than the question of(...) Should You React To The Surge In Stock Market Volatility? [Capital Spectator]The coronavirus that’s roiling world markets and raising questions about the economic outlook has triggered a familiar shock to stocks: higher volatility. Is this a reason to change your asset allocation, rebalance the portfolio or modify risk management decisions? Maybe, but maybe not. There is(...) The Graphical Lasso and its Financial Applications [Robot Wealth]Way back in November 2007, literally weeks after SPX put in its pre-GFC all-time high, Friedman, Hastie and Tibshirani published their Graphical Lasso algorithm for estimation of the sparse inverse covariance matrix. Are you suggesting that Friedman and his titans of statistical learning somehow(...) Algo Trading in the Cloud [Ran Aroussi]The last few months got me busy like a bee... It all started in 2016 with the release of QTPyLib. I was trying to shorten the time it takes to go from an idea to live trading by abstracting all the techie stuff as much as possible (while still allowing flexibility for developers). Last year I shared(...) Drawdowns by the data [OSM]We’re taking a break from our series on portfolio construction for two reasons: life and the recent market sell-off. Life got in the way of focusing on the next couple of posts on rebalancing. And given the market sell-off we were too busy gamma hedging our convexity exposure, looking for cheap(...) Last Week (Painfully) Illustrated the Importance of Non-Binary Portfolios [Allocate Smartly]This is one of my favorite takes of the last week. It was tweeted on Friday, which held two distinctions: (1) It capped off a helluva scary week, and (2) It just so happened to be month-end, when many TAA strategies trade by default. I couldn’t agree more. Imagine making a single risk on/risk off(...) How do Institutional Investors approach Climate Risks? [Alpha Architect]Private and public companies face direct costs related to three types of climate risks: physical (i.e. extreme weather), regulatory (i.e. policies and regulations implemented to combat climate change), and technological (i.e. electric or fuel-cell-powered vehicles could disrupt traditional car(...) Volatility vs Risk - Revised [Two Centuries Investments]Given the increasing drawdown in the market, it seems prudent to revisit the notion of volatility vs risk. See original post here. 1) To recap, in case you just got back from a 10 day silent mediation retreat, S&P500 peaked on Feb 19th 2020, and has been in pretty much a free-fall since then,(...) Domestic Fixed Income Factor Implementations [Flirting with Models]Prior academic and practitioner research suggests that factor-based fixed income investing can create attractive return profiles and be useful when building fixed income portfolios. Using an investment universe of eight domestic fixed income asset classes, we build dollar-neutral long-short(...) ESG vs Low Carbon Investing [Factor Research]ESG and Low Carbon portfolios feature significant, but different sector & country biases Investors should expect large tracking errors in some ETFs Some products contain stocks that are likely unexpected and undesired INTRODUCTION Investors seeking exposure to global equities with a low carbon(...) Smart Money Indicator Rebuttal [Alpha Architect]In February 2019, Wes asked that I share my research on what I call the “Smart Money Indicator.” I did a guest post on the subject that summarized the results of a paper introducing my research on the topic. The indicator measures the relative sentiment in equities between institutional(...) pandas for Quants: New Video Course from QaR [Quant at Risk]Hi Guys! I’m happy to kick off a new series of free video lectures devoted to Python’s library of pandas. Every week, I will be uploading something between 2 to 4 new videos especially crafted around practicalities of pandas library applied to financial data and their analysis and processing.(...)