Earlier this month I briefly reviewed a recent BlackRock report that highlighted that macroeconomic factors are typically driving investment strategy results. As a follow-up, let’s take a quick look at a basic real-world example of analyzing portfolios through a macroeconomic lens. First, let’s

Interest rates and yield curves are not observable, but need to be estimated from prices of fixed-income securities. Common patterns in prices of fixed-income securities can be expressed in three ways: yield curves, forward rate curves or discount functions. When working with interest rates, we need

Investing is simple, but not easy, as Warren Buffett says. And yes — technically the investment process should be as simple as possible. But does it mean that an average investor should not even think about active investment strategies and entirely rely on a passive portfolio? Which strategy is

We are continuing in our short series of articles about calendar / seasonal trading. In our previous work, we have examined various calendar / seasonal equity trading strategies. In this study, we aim to take this composite calendar strategy as a building block and add another block to enhance the

The size premium is one of the factors that we have researched and dug into several times on the blog. You can find just a few here, here, and here. This paper though took a fresh look at the size premium and adds a new perspective that we haven’t previously covered. What are the research

Concept: Large price moves tend to be followed by large price moves, and small price moves tend to be followed by small price moves (Volatility Clustering). Research Question: Can we improve performance of the original volatility clustering model via standard deviation filtering of large price

When developing a new trading strategy you are usually confronted with multiple tasks: Design the entry, design the exit and design position sizing and overall risk control. This article is about how you can test the edge of your entry signal before thinking about your exit strategy. The results of

To generate returns that are different than the market, we must adopt a positioning that is different than the market. With the increasing adoption of systematic factor portfolios, we explore whether an anti-factor stance can generate contrarian-based profits. Specifically, we explore the idea of

Tradable economics is a technology for building systematic trading strategies based on economic data. Economic data are statistics that – unlike market prices – directly inform on economic activity. Tradable economics is not a zero-sum game. Trading profits are ultimately paid out of the

Factor exposure analysis is essential for performance and risk contribution However, the results vary depending on methodologies, factor definitions, and other assumptions A holdings-based approach is preferable over regression analysis INTRODUCTION A large part of a capital allocator’s job is to

The inspiration for this post comes from a new paper titled Predictable End-of-Month Treasury Returns (h/t Capital Spectator). A description from the authors: We document a distinct pattern in the timing of excess returns on coupon Treasury securities. Average returns are positive and highly

Researchers love novel datasets–it gives them a new set of information to conduct studies and test theories. That brings us to this paper, titled “Core Earnings: New Data and Evidence” by Ethan Rouen, Eric So, and Charles C.Y. Wang. The paper uses a novel database created by our friends at

For this post, I want to take a look at the concept of intra-day momentum and investigate whether we are able to identify any positive signs of such a phenomenon occurring across (quite a large) universe of NYSE stocks. It has been suggested that, for the wider market in general at least, there is a

Let’s start with an experiment. We divide people into two groups, A and B. Then, we ask group A to guess how old Mahatma Gandhi was when he died, taking into account it was after age 9. And we ask group B the same question but taking into account that it was before age 140. Of course, the extra

Pairs trading is supposedly one of the most popular types of trading strategy. In this strategy, usually a pair of stocks are traded in a market-neutral strategy, i.e. it doesn’t matter whether the market is trending upwards or downwards, the two open positions for each stock hedge against each

Many famous investors are outspoken about their investment philosophies, and carefully apply them to a select number of securities. Who among us hasn’t thought if they could at least capture some of the talents of our favorite investors in a bottle, we too could be super investors? Turns out you

While the quality factor has been identified in the literature (including papers such as “Buffett’s Alpha,” “Global Return Premiums on Earnings Quality, Value, and Size,” and “The Excess Returns of ‘Quality’ Stocks: A Behavioral Anomaly”), and there are now a number of investment

Some bloke* once said "The most overlooked characteristic of a strategy is the expected skew of it's returns, i.e. how symmetrical they are" * It was me. "Systematic Trading" page 40 Skew then is an important concept, and one which I find myself thinking about a lot. So

Equity income mutual funds have underperformed the S&P 500 since 1988 Especially on a post-tax basis Investors can create tax-efficient equity portfolios, but it does not represent a free lunch INTRODUCTION Warren Buffett is probably the most well-known and well-liked investor, which is easily

After the Great Financial Crisis, the Momentum factor has exhibited positive returns, but those returns have been largely driven by the short side of the portfolio. One research note suggests that this is driven by increased risk aversion among investors, using the correlation of high volatility and

Most asset allocation approaches are more or less static. From 60/40 to Risk Parity, such allocations can be easily replicated with a couple ETF’s, and so the outcomes of static asset allocation portfolios, especially the risks such as drawdowns, are 90%+ pre-determined. There is a strand of

I have recently been reading about more modern ways to decompose a matrix. Singular value decomposition is a popular way, but there are more. I went down the rabbit whole. After a couple of “see references therein” I found something which looks to justify spending time on this. An excellent

Explaining the Demise of Value Investing Baruch Lev (NY University) and Anup Srivastava (U. of Calgary) August 25, 2019 The business press claims that the long-standing and highly popular value investing strategy—investing in low-valued stocks and selling short high-valued equities—lost its edge

Scikit-learn is one of the most versatile and efficient Machine Learning libraries available across the board. Built on top of other popular libraries such as NumPy, SciPy and Matplotlib, scikit learn contains a lot of powerful tools for machine learning and statistical modelling. No wonder scikit

The crowning achievement for investors is the ability to identify which of the few active mutual funds will outperform in the future. Despite an overwhelming body of academic research which has demonstrated that past performance doesn’t guarantee future performance and (as the annual SPIVA

Most of us focus our research time looking to find better entries. We don’t spend enough time thinking about our exits. I am definitely guilty of this. A popular way to enter a mean reversion trade is by using a limit order. I use that on the strategy on RSI2 Strategy: Double returns with a simple

In the first three posts of this mini-series on pairs trading with Zorro and R, we: Implemented a Kalman filter in R Implemented a simple pairs trading algorithm in Zorro Connected Zorro and R and exchanged data between the two platforms In this fourth and final post, we’re going to put it all

What good is synthetic data for in a financial setting? This is a very valid question, given that data augmentation techniques can be hard to evaluate and the time series they produce are very complex. As we will see in this post however, it turns out that synthetic series can be very useful!

What is a crowded trade? What is asset centrality? Does asset centrality predict bubbles? Can it be exploited? What are the Academic Insights? In the normal course of events, investors perceive and act upon changes in fundamentals that will persist indefinitely (or until the next change in

Big swing down. The State of Trend Following report erased most of the gains for the year in one sharp down month. Please check below for more details. Detailed Results The figures for the month are: September return: -8.85% YTD return: 0.96% Below is the chart displaying individual system results

Yield curve changes over time can be decomposed into Level, Slope, and Curvature changes, and these changes can be used to construct portfolios. Market shocks, monetary policy, and preferences of different segments of investors (e,g. pensions) may create trends within these portfolios that can be

Took a look at my book shelf this morning and decided to share some of my non-finance books that help me grow as a quant investor. It’s an eclectic list, not in the order of importance. “A More Beautiful Question” by Warren Berger “Rework” by Jason Fried and David Heinemeier Hansson

While the stock market is open on Monday, banks, schools, government offices, and the bond market are closed. In past years with the bond market closed, the stock market has done quite well on Columbus Day. Of course the most famous Columbus Day rally was in 2008 when the market gained over 11%

AI-focused companies have underperformed markets AI-powered ETFs have generated unimpressive returns In contrast, AI-powered hedge funds easily beat their benchmark, but the performance can be challenged INVESTING IN AI VERSUS AI INVESTING “AI will probably most likely lead to the end of the

In this blog post I wanted to run a couple of quick experiments to see how clearly I was able to highlight the importance of incorporating various elements and components into a backtest that I admittedly often overlook in most of my posts – that is I make the assumption that they will be dealt

Over the years I have posted about several different methodologies for creating synthetic data and I have recently come across yet another one which readers may find useful. One of my first posts was Creation of Synthetic Data, which essentially is a random scrambling of historic data for a single

One measure of the crowdedness of trades in a portfolio is centrality. Centrality is a concept of network analysis that measures how similar one institution’s portfolio is to its peers by assessing its importance as a network node. Empirical analysis suggests that [1] the centrality of individual

Research into the momentum factor continues to demonstrate its persistence and pervasiveness, including across factors. Recent papers have focused on trying to identify ways to improve the explanatory power and performance of momentum strategies. Prior research on Momentum The study “Momentum Has

Financial academics have described so many equity factors that the whole universe of them is sometimes called “factor zoo”. Therefore, it is no surprise that there is a quest within an academic community to bring some order into this chaos. An interesting research paper written by Favilukis and

Marcos Lopez de Prado, who was named Quant of the Year for 2019 by the Journal of Portfolio Management, is widely regarded as one of the leading quantitative mathematicians in today’s financial world. He currently ranks #1 among authors in the economics field on the SSRN research network, as

Image processing is one of the hot topics in AI research, alongside with reinforcement learning, ethics in AI and many others. A recent solution to perform ordinal regression on age of people has been published, and in this post we apply that technique to financial data. Ranking classification is an

In this tutorial we utilize the free Alpha Vantage API to pull price data and build a basic momentum strategy that is rebalanced weekly. This approach can be adapted for any feature you’d like to explore. Let me know what you’d like to see in the next video!

In an earlier post we analyzed the prominent and often-cited study on “net-nets” conducted by Henry R. Oppenheimer from the Financial Analysts Journal (1986). In this post, we analyze the article “Graham’s Net-Nets: Outdated or Outstanding?” by James Montier. The objective of the article

One of the advantages of running automatic trading strategies is that you can quickly and consistently act on price action. Even if you have enough time to trade the same idea manually, you need to watch the market movement very closely and keep paying attention to multiple monitors. With

Enjoy 15% off with the promo code: QUANTOCRACY2019. The Quant Conference has been conceived as an educational setting where attendees can learn about the current trends in the field of quantitative finance. Furthermore, it brings a unique opportunity to network with aspiring students, professional

A stop-loss order, or stops as is generally said, is an order placed with the broker to sell (or buy) if the stock of a company which you hold, reaches a pre-determined price in order to avoid large losses. In the trading world, the use of stops is seen as an essential part of risk control and money

Asset allocation is a very important decision for investors. Model portfolios are constructed with an optimized asset allocation process to help meet investor needs and preferences. The authors investigate the following research question: How does one construct a model portfolio? What are the

As trading costs have just hit zero, and passive investing overtook active in August, the investment industry is braced for further pressure to deliver alpha after fees. In my view, the potential to build great models today is huge, but constrained by the research cultures of most firms. Here is

While it may be tempting to time allocations to active strategies, it is generally best to hold them as long-term allocations. Despite this, some research has shown that there may be certain economic environments where trend following equity strategies are better suited. In this commentary, we

Option-based strategies have similar characteristics to Low Volatility portfolios Combining these reduces idiosyncratic strategy risks The combinations feature higher risk-adjusted returns and lower drawdowns than the S&P 500 INTRODUCTION Some investment products and strategies can be considered