In the last post in our machine learning series, we showed how nonlinear regression algos might improve regression forecasting relative to plain vanilla linear regression (i.e., when underlying reality is nonlinear with complex interactions). In this piece, we’ll first review machine learning for

“Diversification is the Only Free Lunch” I’m sure everyone has heard this old adage at some point in their trading career. Most people probably shrug it off and go back to watching The Big Short and dreaming of putting on that one career-making trade. Or maybe they’re still trying to figure

As I have mentioned in several interviews, I am always looking for new strategies. One area that fascinates me is stock options. Because it is difficult to get good data and to do backtests, I believe that there are good edges here to be found. A few weeks ago, I found myself with lots of time and

While there have been a few cyclical periods of rising rates over the past 40 years, we've largely been in one large downtrend... meaning that it has consistently paid to own bonds vs cash / take duration risk for nearly my / many investment lives. Now that we've moved away from a zero

A game of cat and mouse. Technological development more often than not stays ahead of regulators. Each new technological advance or disruption carries risks for the stability of things and advantages for those who are at the forefront. Regulators try to set rules and good practices that limit

What are the Research Questions? This editorial introduces data science to the wider investment community and highlights some of the advantages (and potential pitfalls as discussed yesterday) it can bring to everyday investment practice. The paper answers two apparently simple questions: What is

The US stock market is the largest and most liquid stock market in the world and tends to get all the attention. Many brokers and trading platforms are US-only, and many traders focus exclusively on the US market. This post compares the number of stock listings in each of 17 countries to quantify

Portfolio risk is often measured as the variance of returns over time. Another form of risk is the variance of terminal wealth that can arise from small variations in strategy inputs or asset returns. Strategies or portfolios that are more sensitive to small changes in inputs are inherently

This research note was originally published by the CAIA Association’s AllAboutAlpha blog. Here is the link. SUMMARY Common equity factors generated attractive risk-adjusted returns in the Chinese stock market Factor performance in China often mirrors global factor performance Indicates common

What are the Research Questions? Data mining in finance has long been a concern for academic researchers. Campbell Harvey, one of the authors on this paper, is leading the effort to ensure the integrity of empirical finance research. For example, see here for a post on his address to the AFA. The

This week Ryan and I discuss two posts. First, we examine a guest post by Matthew Bartolini of State Street Global Advisors, discussing the underperformance of Value and its outlook for 2019. Second, we examine a guest post by Elisabetta on a recent JPM paper examining the effects that ETFs have had

Machine learning offers powerful tools for backtesting trading strategies. However, its computational power and convenience can also be corrosive for financial investment due to its tendency to find temporary patterns while data samples for cross validation are limited. Machine learning produces

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

Over several time horizons op-ex week in December has been the most bullish week of the year for the SPX. The positive seasonality actually has persisted for up to 3 weeks. I’ve shown the study below in the blog many times since 2008. It looks back to 1984, which was the first year that SPX

Below I provide a vectorised Octave function to estimate the bid-ask spread from high, low and close prices according to "A Simple Way to Estimate Bid-Ask Spreads from Daily High and Low Prices," (Corwin and Schultz, 2012). The paper can be downloaded from one of the author's homepage

In this blog on random walk simulation, we will learn how to simulate stock prices. Future stock prices are very hard to predict and are dependent on the past trend and volatility. While simulating the stock prices one has to give reasonable weightage to these two parameters. The random walk model

As a follow-up to “Sunspot Cycle and Stock Market Returns” a reader asked: “Sunspot activity does have a direct relationship to weather. Could one speculate on the agriculture market using the sunspot cycle?” To investigate, we relate sunspot activity to the fairly long U.S. Producer Price

A reader asked whether Charles Nenner, self-described as “the talk of Wall Street since accurately predicting some of the biggest moves in the Markets over the past few years,” accurately forecasts equity and commodity markets. We consider the following: In his July 2007 discussion of the

Update: I updated the code so it works with Oanda's new API. Get it here Time to talk about brokers, how to place a trade programmatically and most importantly how not to get scammed. This is the third part of the series: How to build your own algotrading platform. A broker is nothing more than

In line with the previous post Group Funds with the Sun we continue exploring new ways to visualise and analyse financial data. We will take annual data from the current components of Dow Jones Industrial with data going back to 2000 to play around. Animated Risk – Return scatter Risk-Return

We can see thinking machines taking over more and more human tasks, such as car driving, Go playing, or financial trading. But sometimes it’s the other way around: humans take over jobs supposedly assigned to thinking machines. Such a job is commonly referred to as a Mechanical Turk in

Borne in academia and raised by fund managers seeking to outperform, value style mutual funds and ETFs today hold close to $2 trillion(1). But with poor returns over the past decade, the question of whether “value is dead” has become a popular topic of conversation.(2) The search term “is

What are the Research Questions? The paper investigates the following research question: Have ETFs flows affected the correlation structure of returns? Have ETFs flows affected the liquidity of underlying securities? Have ETFs flows affected the ability of managers to generate alpha? What are the

The risk-free rate is an important concept in financial theory, but the risk-free rate accessible to most investors can vary significantly in level. The variation in risk-free rate not only has an important impact on the theoretically optimal portfolio, but it can have a very real impact upon

Equity factors exhibit sector biases and exposures to other common factors A factor optimisation process allows investors to create pure factors Risk-adjusted returns do not increase, but pure factors are attractive from analytical, risk and allocation perspectives INTRODUCTION When large quantities

Across assets, carry is defined as return for unchanged prices and is calculated based on the difference between spot and futures prices (view post here). Unlike other markets, commodity futures curves are segmented by obstacles to intertemporal arbitrage. The costlier the storage, the greater is

The title of this post is not original and draws from Nate Silver's book on why so many predictions in politics, sports and economics fail. It reflects the skepticism with which I view many 'can't fail" predictors of economic growth or stock markets, since they tend to have

This post is all about handcrafting; a method for doing portfolio construction which human beings can do without computing power (although realistically you'd probably need a spreadsheet unless you're some kind of weird masochist). The method aims to achieve the following goals: Humans can

Trend following is well-known and the simplest version is as follows: you buy an asset when it has positive momentum (the price goes up) and you sell it and go to cash (or any other safe haven) when the momentum turns negative.(1) The best-known example of trend following is on the monthly ETF SPY

The SPX could complete a “Death Cross” formation today or tomorrow, in which the 50-day moving average crosses below the 200-day moving average. In the past I have looked back to 1960 when examining Death Crosses. This time I decided to use Amibroker with my Norgate database, which goes back to

You can watch the video via the link below: This week Ryan and I discuss three posts. First, we examine a guest post titled, “Trend Following on Steroids,” which examines ways to enhance a simple trend-following strategy. Second, we examine a post I wrote regarding how to use trend-following

In my previous article, we have developed a simple artificial neural network and predicted the stock price. However, in this article, we will use the power of RNN (Recurrent Neural Networks), LSTM (Short Term Memory networks) & GRU (Gated Recurrent Unit Network) and predict the stock price. We

I've talked around a type of portfolio construction called "Handcrafting" for some time now, in both of my first two books, and in the odd blog post. I thought it would be useful to explain how the technique works in a more thorough and complete series of blog posts, and also share

While writing my presentation for TradersFest 2018, I wanted to add the trader’s emotional curve. But looking at it closer, it did not capture my feelings as I go through the cycle of up and downs of trading a strategy. Here is my curve. I have been on every part of this curve multiple times.

I. Trading Strategy Developer: Gerald Appel. Source: Appel, G. (2005). Technical Analysis. NJ: Pearson Education, Inc; Star, B., PhD (2016). Zero In On The MACD. Stocks & Commodities, May 2016. Concept: Trend following trading strategy based on the MACD (Moving Average Convergence Divergence)

A new interesting financial research paper gives an idea to build a diversified portfolio of leveraged ETFs (scaled down to have the same risk as a benchmark asset allocation built from a non-leveraged ETFs) to beat benchmark asset allocation. However, caution is needed as the most of the

A question we have been receiving recently is the following: How should I use trend following within a portfolio? Generally, the questions are related to our Global Value, Momentum, and Trend Index, which allocates to the (1) Value, (2) Momentum, and (3) Trend factors. A big difference between the

This post will review Kris Boudt’s datacamp course, along with introducing some concepts from it, discuss GARCH, present an application of it to volatility trading strategies, and a somewhat more general review of datacamp. So, recently, Kris Boudt, one of the highest-ranking individuals pn the

Let's begin this post with a gross generalisation: Professional traders tend to measure risk and target risk using standard deviation. Amateur traders tend to use a funky little number called the ATR: 'Average True Range'. Both try and achieve the same aim: summarise the typical

Diversification within a portfolio can be quantified using the diversification ratio, which measures how much the volatility is reduced relative to a scenario where all assets are perfectly correlated. By maximizing the diversification ratio, we can construct the most diversified portfolio for a

What are the research questions? USES: Can investors really separate “alpha” from “beta”? What are the ins-and-outs of understanding the exposures in a portfolio and their contribution to “alpha”? ABUSES: Are there differences in the way strategies are constructed in academic articles

This research note was originally published by the CFA Institute’s Enterprising Investor blog. Here is the link. SUMMARY Private equity returns can be replicated with small cap equities Small, cheap and levered stocks would have achieved higher returns since 1988 Valuation and debt multiples are

How have costs of U.S. stock trading data evolved in recent years? In his October 2018 paper entitled “Retail Investors Get a Sweet Deal: The Cost of a SIP of Stock Market Data”, James Angel examines costs of U.S. stock market data. He also describes the production of these data and their

This is a summary of the recent performance of a wide range of excellent tactical asset allocation 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 are

The correlation of equity and high grade sovereign bond returns is a powerful driver of portfolio construction and the term premia of interest rates. This correlation has turned from positive in the 1970s-1990s to negative in the 2000s-2010s, on the back of similar shifts in the correlation between

Factor Investing: Get Your Exposures Right! François Soupé (BNP Paribas Asset Management), et al. October 26, 2018 This paper is devoted to the question of optimal portfolio construction for equity factor investing. The first part of the paper focusses on how to make sure that a given equity

A reader pointed me the November 2018 issue of Technical Analysis of Stocks & Commodities to an article about a trend following indicator on S&P500 stocks. I liked the concept of the indicator and the article had backteted results and AmiBroker code. How could I resist not looking into this?

Deep Reinforcement Learning applications in finance are still largely unknown. Nonetheless, recent developments in other fields have pushed researchers towards exciting new horizons. I believe that there is a huge potential for Reinforcement Learning in finance. As investment guru Ray Dalio, founder

While the SPX closes higher on Tuesday, NYSE breadth was weak – both from an % Up Issues and % Up Volume standpoint. This triggered the study below from the Quantifinder. I also discussed it in last night’s subscriber letter. 2018-11-28-1 Here we see numbers suggesting a substantial bearish edge

Broadly speaking, we can classify financial markets conditions into two categories: Bull and Bear. The first is a “todo bien” market, tranquil and generally upward sloping. The second describes a market with a downturn trend, usually more volatile. It is thought that those bull\bear terms