This post is all about handcrafting; a method for doing portfolio construction which human beings can do without computing power, or at least with a spreadsheet. The method aims to achieve the following goals: Humans can trust it: intuitive and transparent method which produces robust weights Can be

Covered interest parity is an arbitrage condition that equalizes costs of direct USD funding and of synthetic USD funding through FX swaps. Deviations are called dollar cross-currency basis and have become a common occurrence since the great financial crisis. A negative dollar basis means direct

We have all heard the mantra, “You can’t time the market!” But in reality, investors attempt to do just that every day as part of their tactical asset allocation strategies, which are less extreme variants of the classic trend-following “risk-on/risk-off” approach, which many associate

In a previous post, we took a look at the computation of a portfolio’s exposure to its allocations. Then, to show the effects of active management, we compared the return made by two portfolios. But there is so much more to look inside the financial time series. Since we left a couple of

The first risk of investing is the Drawdown Risk - the loss from the peak. The second risk of investing is the Low Return Risk - the under-performance vs. expectations over a stretched period of time. First, a few words about drawdown. Quants measure risk in many ways like Volatility, Skew,

In the afternoon of February 5th, 2018, what looked like a bad day for a group of high flying volatility-based products turned into a devastating decline. Four factors combined to ruin their day: A Flawed Architecture Relying on the Past to Predict the Future Billions Under Management A

What are the Research Questions? The authors investigate the asset pricing implications of corporate manager sentiment, focusing on its predictability for future U.S. stock market returns. Specifically, they ask the following research questions: Does high corporate manager sentiment lead to

In this commentary, we discuss what we mean by the phrase, “no pain, no premium.” We re-frame the discussion of portfolio construction from one about returns to one about risk and argue that without risk, there should be no expectation of return. With a risk-based framework, we argue that

Hot off the press, a new paper by Guido Baltussen, Laurens Swinkels and Pim van Vliet at Dutch quant powerhouse, Robeco, covers global multi-asset factor premiums over an unprecedented sample of 217 years. We thought the topics and findings were important and timely enough to warrant a summary. The

Behavioral-finance models are often written down so that, although each individual trader holds incorrect beliefs, market events nevertheless unfold in such a way that traders can rationalize their own errors. e.g., consider the model in Scheinkman and Xiong (2003). In this model, each individual

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

Momentum trading, buying winning assets and selling losing assets, is a most popular trading strategy. It relies on sluggish market adjustment, allowing the trader to follow best-informed investors before the more inert part of the market does. Herding simply means that market participants imitate

What are the research questions? China represents the world’s second largest stock market and a growing component of the world’s GDP. China also operates under peculiar political and economic environments relative to the market economies of the Western world. Because China is so unique, a

Are some types of cars attractive alternative investments? In their September 2018 paper entitled “My Kingdom for a Horse (or a Classic Car)”, Dries Laurs and Luc Renneboog investigate price determinants and investment performance of classic cars from veteran cars (built 1888-1907) through

For my retirement accounts, I like to trade ETF strategies that require little work. One strategy we have all seen is the SPY/TLT strategy. There are many flavors of this concept. Some pick the best one over the last N months. Then there are different ways of allocating a portion of the portfolio to

Candlestick chart patterns are one of the most widely known techniques that claim to “predict” the market direction inside technical analysis circles. The development of this technique goes back to 18th century Japan, and it’s attributed to a Japanese rice trader. It consists of finding

Marcos Lopez de Prado, a member of Mathematicians Against Fraudulent Financial and Investment Advice (MAFFIA), has been named “2019 Quant of the Year” by Journal of Portfolio Management. Here are some excerpts from their press release: The Journal of Portfolio Management (JPM) has named Marcos

Investors always want to know what’s cheap—cheap relative to the opportunity set and relative to history. Cheapness could refer to any number of things—price relative to trailing twelve months earnings, to trailing earnings over multiple years, to analyst earnings estimates, to long-run

While there exists a well-established (at least a century-old) academic interest in the long-run properties of asset class returns like the U.S. Equity, Fixed Income, Commodity and Real Estate Markets, only during the past decade, has there emerged a branch of literature studying the cross-sectional

Wednesday is a Fed Day – a day in which the Federal Reserve concludes their scheduled meeting and releases a policy statement. Fed Days have historically shown a bullish inclination (up until Powell took over last year, as I showed on Sunday). One interesting aspect of Fed Days that I covered in

Long/flat trend-following strategies have historically delivered payout profiles similar to those of call options, with positive payouts for larger positive underlying asset returns and slightly negative payouts for near-zero or negative underlying returns. However, this functional relationship

Commission Free Trading API Trading with commission free API opened up many interesting ideas. Lots of people liked the idea of trading stocks using Google Spreadsheet, and some people have been building their own Slack integrations. You can even build a robo advisor that automates longer-term

In a recent ETF column, Allan Roth listed five investment lessons. While I agreed with much of what he wrote, one claim—factor investing has “failed miserably”— called for examination of the facts. But first, a little background. William Sharpe, Jack Treynor and John Linter are typically

The application of the machine learning models is to learn from the existing data and use that knowledge to predict the future unseen events. The model needs to be thoroughly tested and cross-validated to profitably trade in live trading. After reading this, you will be able to: Cross validate

Cross-asset multi-factor exposure might be an attractive diversifier for an equity portfolio Factors share trends across asset classes, indicating common drivers However, relationships are time-varying, increasing complexity and risks INTRODUCTION There is a 72% probability of the San Franciso Bay

There is so much hype and confusion surrounding AI and alt data at the moment. The AI & Data Science in Trading conference separates the hype from the reality” Professor David Hand, Imperial College, London Finding alpha has always required asset managers to ‘raise the bar’ in terms of

There is a 72% probability of the San Franciso Bay Area getting hit by at least one earthquake of a magnitude of 6.7 or stronger between today and 2043 according to the United States Geological Survey, which is a scientific agency of the U.S. government. An earthquake of that magnitude is likely to

A higher-order function is a function that takes one or more functions as arguments, and\or returns a function as its result. This can be super handy in programming when you want to tilt your code towards readability and still keep it concise. Consider the following code: # Generate some fake data

Fed Days have a long history of showing a bullish tendency, and we have a large number of Fed Day studies to refer. For those that are unaware, a Fed Day is simply a day where the Federal Reserve completes a scheduled meeting and provides a policy announcement. Meetings typically take place 8 times

In today’s video, we examine three posts. First, we examine ESOPs and 1042 QRP (qualified replacement property) with Doug Pugliese. Second, we examine a guest post by Nicolas Rabener examining Value, Momentum and Carry over the past 10 years. Last, we examine a guest post by Elisabetta discussing

This post will introduce KDA Asset Allocation. KDA — I.E. Kipnis Defensive Adaptive Asset Allocation is a combination of Wouter Keller’s and TrendXplorer’s Defensive Asset Allocation, along with ReSolve Asset Management’s Adaptive Asset Allocation. This is an asset allocation strategy with a

Defining Technical Chart Patterns Programmatically Ever wondered how to programmatically define technical patterns in price data? At the fundamental level, technical patterns come from local minimum and maximum points in price. From there, the technical patterns may be defined by relative

In 2012, Eike Batista had an estimated worth of more than $35 billion. The self-made Brazilian billionaire created an empire that stretched from mining to oil to public works. Many considered him the pride of Brazil. Barely two years later, he had lost all $35 billion…and owed another $1.2 billion

Six recent asset allocation articles (tactical or otherwise) that you might have missed: 1. Fragility Case Study: Dual Momentum GEM (Newfound) + Response from Gary Antonacci Corey’s post kicked off quite a lively discussion. I encourage you to click through to both pieces, but here’s the

(This is an excerpt from my upcoming book on positional option trading.) The traders’ concept of the Efficient Market Hypothesis (EMH) is, “making money is hard”. This isn’t wrong, but it is worth looking at the theory in more detail. Traders are trying to make money from the exceptions to

Rankings are everywhere in the finance industry. A number of papers identify bonus schemes and tournament incentives(1) among the main drivers of excessive risk-taking in developed financial markets. The article studies the impact of rankings on professionals’ risk-taking investment decisions.

While retirement planning is often performed with Monte Carlo simulations, investors only experience a single path. Large or prolonged drawdowns early in retirement can have a significant impact upon the probability of success. We explore this idea by simulation returns of a 60/40 portfolio and

China exhibits the world’s highest corporate debt as % of GDP However, Chinese stocks are not significantly more levered than U.S. stocks Asset and debt growth has stalled in 2018, likely indicating an economic slowdown INTRODUCTION The McKinsey Global Institute published an influential study in

Containment of drawdowns and optimization of performance ratios for multi-asset portfolios is critical for trading strategies. Alas, short data series or structural changes often render estimates of covariance matrices unreliable. A popular solution is risk-parity with volatility targeting. An

Jack Bogle, founder of Vanguard Funds and a life-long apostle of index investing, died on 16 January 2019. Vanguard CEO Tim Buckley summarized his career in these terms: “Jack Bogle made an impact on not only the entire investment industry, but more importantly, on the lives of countless

The October 2018 market correction where the S&P 500® Index fell by 7%, its worst October since 2008,(1) left investors searching for a culprit. Some of the usual suspects were blamed — rising geopolitical tensions ahead of the US midterms, the high likelihood of a slowdown in economic and

Welcome to the newly re-titled weekly video, Compound Your Knowledge. In today’s video, we examine three posts. First, we examine a simple analysis of 2018 Factor portfolio returns. Second, we examine a guest post by Jon Seed examining Warren’s put options, and how they are different than most

Corey Hoffstein of Newfound Research recently wrote an article called, “Fragility Case Study: Dual Momentum GEM.” Corey starts out saying my dual momentum approach is the strategy he sees implemented the most among do-it-yourself tactical investors. Corey then said several investors bemoaned

This is a test of two tactical asset allocation strategies from Brian Livingston’s new book Muscular Portfolios and his site MuscularPortfolios.com: the “Mama Bear” and “Papa Bear” Portfolios. The short and sweet take: neither of these strategies tread new ground – they’re both based

As I write this around 11am EST both NFLX and CELG are threatening to close up > 50% from their December 24th closing price, just 14 trading days ago. While that sometimes happens with speculative smallcap stocks, it is very unusual to see a largecap S&P 100 stock accomplish such strong gains

Factor investing is a broadly used approach in asset management, specially for the equity market, but, can we apply this idea in order to explain currency returns? The idea at the core of factor investing is that there are different sources of risk in the market and that the exposure of the

We’ve posted our quarterly attribution materials on our performance site.(1) We enjoyed putting the materials together and think they will be informative for those who follow our Indexes. The materials and videos are part of our long-term plan is to continually improve our quarterly communications

Trading and investing doesn’t have to be complicated. Check out this chart: source: Dimson, Marsh and Staunton, Triumph of the Optimists The blue line shows returns from US Stocks from 1900 to today. That’s a 48,000x increase in nominal value. The yellow line shows returns from US Bonds from

Many quantitative trading strategies thrive in high volatility regimes, while other trading strategies work best in low volatility regimes. So which global markets are the most and least volatile? This post compares the daily, overnight, and intraday volatility of 17 countries. Methodology Using

The purpose of this study was to examine the changes in the distribution of the US equity risk premium as the return horizon varies from monthly, annually, 3 year, 5 year, 10 year, 20 and 30 year periods. The equity premium was calculated as the monthly difference between the Market and Treasury