Welcome to the concept of Meta-Labeling. This blog post investigates the idea and tries to help build an intuition for what is taking place. The idea of meta-labeling is first mentioned in the textbook Advances in Financial Machine Learning by Marcos Lopez de Prado and promises to improve model and

Recent public reports have underscored a crisis of reproducibility in numerous fields of science. Here are just a few of recent cases that have attracted widespread publicity: In 2012, Amgen researchers reported that they were able to reproduce fewer than 10 of 53 cancer studies. In 2013, in the

Imagine that you spend a few minutes a month to manage your investment. All is rule-based, statistically significant, simple and logical. No place for discretionary decisions, no guessing, no gut feeling, no forecasting. And in the long-term, you are almost sure to beat all the actively managed

Diverse hedge fund strategies can be replicated via factor-mimicking portfolios The analysis highlights that most returns are explained by factors, not alpha However, hedge funds can create value by harvesting factor returns efficiently via portfolio construction INTRODUCTION In 1973, the U.S. Food

One aspect of recent market action that is interesting is the weakness in the Russell vs the SPX over the last few days. While some may worry the divergence is concerning, an old Quantifinder study that appeared last night indicates the setup is likely suggestive of an upside edge. It looked at

Bonds are key to a well-diversified portfolio; they’ve provided both consistent returns and consistent diversification against riskier asset classes like stocks and real estate. But bonds face stiff headwinds in the coming years. That’s not prognostication, it’s a mathematical certainty.

mlfinlab is a “living and breathing” project in the sense that it is continually enhanced with new code from the chapters in the Advanced Financial Machine Learning book. We have built this on lean principles with the goal of providing the greatest value to the quantitative community. Currently

The Perfect Withdrawal Rate (PWR) is the rate of regular portfolio withdrawals that leads to a zero balance over a given time frame. 4% is the commonly accepted lower bound for safe withdrawal rates, but this is only based on one realization of history and the actual risk investors take on by using

Only showing the latest backtest versions without disclosing their out-of-sample degradation Backtesting today’s static holdings (managers, asset allocations, sub-asset-classes) into the past - filled with look-ahead bias Charging fees that are on par with the tracking error of the strategy Asking

In this week’s post, we discuss two posts. The first post, written by Elisabetta, examines a new method attempting to directly measure aggregate investor overconfidence. The second post, written by Larry Swedroe, examines issues that plague Factor Investing.

In this post I will be looking at a few things all combined into one script – you ‘ll see what I mean in a moment… Being a blog about Python for finance, and having an admitted leaning towards scripting, backtesting and optimising systematic strategies I thought I would look at all three at

We are creating a series of long-form educational videos that present materials often covered in our white papers. The intent of these videos is make our content more accessible to visual learners. The video below is a presentation related to a long-form post we have on a post called, “The

Analysing at which time daily market extremes are established shows the significance of the first and last hours of market action. See how different markets show different behaviour and see what can be learned from this analysis. Probability of Extremes A day of trading usually starts with a lot of

Decision trees are often used while implementing machine learning algorithms. The hierarchical structure of a decision tree leads us to the final outcome by traversing through the nodes of the tree. Each node consists of an attribute or feature which is further split into more nodes as we move down

I've been a little curious how the SPX strangle has been performing since I last analyzed it's results back in 2015. For this article, we'll just look at the following variations and how they performed from January 2007 through December 2018: 59 DTE - 16 Delta Short Strikes (100:50) /

Ever since Yahoo! Finance decommissioned their historical data API, Python developers looked for a reliable workaround. As a result, my library, fix-yahoo-finance, gained momentum and was downloaded over 100,000 acording to PyPi. fix-yahoo-finance aimed to offer a temporary fix to the problem by

Hard to believe, but it has been five and a half years since I had to go to an office to manage other peoples money, and exactly five years since I began systematically trading my own. Time then for another annual review. Perhaps it is confusing for overseas readers, but these reviews follow the UK

Understanding classification of market regimes is fairly important in finance. It all comes down to correctly predicting the way prices are going to move. But prediction isn’t the only crucial thing; knowing how to describe what has already happened is also of great importance. In this QuantDare

For those interested in the literature on factor-based investing, a new paper by Robert Arnott, Campbell Harvey, Vitali Kalesnik and Juhani Linnainmaa, “Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing,” focuses on why, in some ways, it has failed to live up to its

Marcos Lopez de Prado, recently named 2019 Quant of the Year by the Journal of Portfolio Management, has released a presentation entitled The seven reasons most econometric investments fail. Lopez de Prado’s overall point is that many widely used econometric approaches in finance either rely on

A factor exposure of Berkshire Hathaway reveals structural factor tilts Long Value, Size, Quality, and Low Volatility factors and short Growth and Dividend Yield Warren Buffet generated little alpha, but is highly skilled at harvesting factor returns SAINTS AND STAR INVESTORS The Vatican waits at

What are the Research Questions? A common assumption in finance theory is that agents in the stock market behave rationally. Even if temporary mispricing occurs, due to irrational beliefs or incomplete information of some agents, arbitrageurs swiftly restore equilibria. In contrast, the history of

Trend following is “mechanically convex,” meaning that the convexity profile it generates is driven by the rules that govern the strategy. While the convexity can be measured analytically, the unknown nature of future price dynamics makes it difficult to say anything specific about expected

In 1921, University of Chicago Professor Frank Knight wrote the classic book “Risk, Uncertainty, and Profit.” An article from the Library of Economics and Liberty described Knight’s definitions of risk and uncertainty as follows: Risk is present when future events occur with measurable

QuantMinds International heads to Vienna on 13-17 May! Now in it’s 26th year, QuantMinds International brings together 400+ global quant finance experts from banks, buy-side, academia and beyond, to cover every hot topic in quant finance over the course of 5 days. Quote VIP code FKN2595QCYMU for a

Alphabet, the largest Internet-based company, has based its success on sophisticated information retrieval algorithms since its origins. Now, 20 years later, one of its divisions is open-sourcing part of its secret sauce, drawing attention from developers all over the world. Since Google was founded

I saw some bullish studies emerge last night. But there was a study below that was not favorable that I thought readers would find interesting. One potential issue with Tuesday’s decline is that it included an unfilled gap down. Generally, an unfilled gap down from a high has more trouble quickly

Everyone knows that the risk profile of systematic strategies can change considerably when equity markets turn down and volatilities spike. For an example, a smooth profile of a short volatility delta-hedged strategy in normal regimes becomes highly volatile and correlated to equity markets in

S&P500 – when to be invested The stock market shows some astonishingly stable date based patterns. Using a performance heat map of the S&P500 index, these patterns are easily found. Date based performance The chart below shows the profit factor of a long only strategy investing in the

The barrier to entry into the factor zoo has increased exponentially. Prof. Harvey (now working with RAFI) made this clear at the 2017 AFA address, when he highlighted the issue with data-mining in front of a room full of academics from top-flight research programs in the country. Prof. Harvey and

Should investors trust academic equity factor research? In their February 2019 paper entitled “A Census of the Factor Zoo”, Campbell Harvey and Yan Liu announce a comprehensive database of hundreds of equity factors from top academic journals and working papers through January 2019, including a

What is the most significant risk in quant (and all active) investing today? The First Moment (the mean) The Second Moment (under-estimating tracking error) The Third Moment (skewness, left tails, crash risk) Mis-specified risk model (hidden factor biases, factors ‘eating’ alphas) Sub-optimal

In today’s video, we examine three articles from last week. The first article, written by Larry Swedroe, examines the Momentum of News. The second article, written by Wes, examines an out-of-sample test on Momentum by looking at Russian stocks in the 19th century. The third article, written by

A few years ago, we blindly applied mean-variance optimization to a set of capital market assumptions, and The Weird Portfolio was born. This portfolio is weird because it does not look like typical investor portfolios since it tilts heavily toward credit-based and alternative asset classes. Despite

Investors have leaned towards multi-factor over single-factor products in recent years The factor selection and portfolio construction of multi-factor ETFs can be challenged Multi-factor ETFs often feature factors, such as growth, which are not supported by academic research while lacking exposure

Many algorithmic traders justifiably worship the legends of our industry, people like Jim Simons, David Shaw, or Peter Muller, but there is one aspect of their greatness most traders have overlooked. They have built their businesses and vast wealth not just by sitting in front of their trading

Python is not the only language In the past, I’ve published stories on Medium showing how to write algorithms that trade stocks based on company fundamentals and how to run a technical analysis day trading algorithm in the cloud. Both of those articles assumed that: Python was the language the

Years ago, strong overbought readings during an uptrend were easily sold – especially when volume came in very light. But that has not held true in recent years. There were several studies I examined last night that noted the low volume, but they have all lost their edge over the last several

In my last post I said that this next post would report the results of tests on a Constant Acceleration model Kalman filter, and the results are: fail, just like the Constant Velocity model, so I won't bore readers with reporting the details of the failed tests. However, tests of a Variable

Slightly negative result for the State of Trend Following last month, leaving the YTD number in slight positive territory. Please check below for more details. Detailed Results The figures for the month are: March return: -0.22% YTD return: 2.55% Below is the chart displaying individual system

Since the development of the capital asset pricing model (CAPM) in the 1960s, hundreds of anomalies (what John Cochrane famously called a “zoo of new factors”) have been uncovered in the cross-section of stock returns. While some of the anomalies (such as the size and value factors) have

Please find this month’s report of the Wisdom State of Trend Following. Performance is hypothetical. Chart for March: The chart for the first quarter: And the 12-month chart: Below are the summary stats: Horizon Return Ann. Vol. Last month 1.49% 12.99% Year To Date -6.21% 12.56% Last 12 months

Do retail investors rationally account for risks as modeled in academic research when choosing actively managed equity mutual funds? In their March 2019 paper entitled “What Do Mutual Fund Investors Really Care About?”, Itzhak Ben-David, Jiacui Li, Andrea Rossi and Yang Song investigate whether

Quantitative investment researchers often seek uniquely optimal parameterizations of their strategies amongst a broad “robust” region of parameter choices. However, this ignores a critically important feature of investing – Diversification. By diversifying across many equally legitimate

I was talking to my trading buddy about the annoying part of trend following strategies. They may get you out of the major sell off but then you miss part of the run up. Using a 200-day moving average on the SPY would have got you out in late 2018. This would have been within 10% from the top and

Topology could be used to gain insight on the shape of our data, as we explained in our last post. Today, we will put this theory into practice by analyzing the 2008 financial crisis. Persistence diagrams We will start by giving an equivalent representation of the persistence barcode that we saw

The SPX made a Golden Cross formation on Monday. A Golden Cross occurs when the 50ma crosses over the 200ma. Having the 50ma above the 200ma is commonly considered a bullish market condition – and generally it is. I used my Norgate data and Amibroker software to look back as far as 12/31/1928.

In a situation where you wish to determine the returns on investment, one may have all the expertise to do this but without certain information (missing pieces) it would not be possible to derive to a conclusive figure. In practical terms “assume you have the value of all returns of all assets in

This is a summary of the recent performance of a wide range of excellent Tactical Asset Allocation (TAA) strategies, net of transaction costs. These strategies are sourced from books, academic papers, and other publications. While we don’t (yet) include every published TAA model, these strategies

What are the research questions? Is there a relationship between short selling activity and insider selling? What is the impact of short selling trading strategies that are conditioned on insider trading signals? Does the price impact of short selling subsume that of insider trading? Is the price