This test is based on the Efficiente Index from JP Morgan. A variation of this strategy is available via the ETF EFFE. The strategy uses traditional mean-variance optimization (aka the “Efficient Frontier”) to trade a broad basket of asset classes, but it’s actually a momentum strategy in

According to MorningStar assets under management of smart beta products breached $1 trillion in 2017 and more than half of the assets were invested in just three factors: Value, Growth and Dividend Yield. Naturally there is a significant amount of empirical evidence that suggests Value stocks

This post will discuss the consequences of ProShares’ decision to change the investment objective of SVXY, and possible alternatives that various investors can use to try and create an identical exposure if their strategy calls for such an instrument. So, to begin with, Proshares recently decided

I am currently working on a method of predicting/projecting cyclic price action, based upon John Ehlers' sinewave indicator code, and to test it I am using Octave's implementation of a Hidden Markov model in the Octave statistics package hosted at Sourceforge. Basically I measure the

Last night I looked at 3-day pullbacks a number of ways in relation to current market conditions. I thought blog readers might find the following interesting. I noted that SPX closed lower by greater than 1% for the 3rd day in a row on Thursday. In the past, that has often been followed by gains the

This is a summary of the recent performance of a wide range of excellent tactical asset allocation strategies. These strategies are sourced from books, academic papers, and other publications. While we don’t (yet) include every published TAA model, these strategies are broadly representative of

The events of the past month, most notably the implosion of XIV, has focused public interest on volatility as an asset class. They’ve also illustrated that short vol as a strategy might be a little more risky than advertised (gasp!). The VIX is supposed to serve as a gauge of how much uncertainty

The main objective is to identify and understand cross-sectional patterns in expected stock returns in PSX(Pakistan Stock Exchange). Our reasons for doing so are simple. First, to effectively execute empirical asset pricing research, it is important to have a deep understanding of the

Well that was fun! I have been telling my trading buddy and anyone else that would listen that I fully expected XIV to open at zero one day. Now I did not expect it to happen so soon or the way it did. I trade a strategy that can be long XIV or long VXX or in cash. Because of the very likely

What are the research questions? This study uses a new classification system for informed vs. uninformed retail trades: short selling stocks without options available indicates more informed trading than short selling stocks with options available. Is there a difference in returns between shorted

wn Day a Black Swan? On February 5, the SP500 experienced a drop of 4% in a day. We ask ourselves the question: is a one-day 4% drop a common occurrence? The table below shows the number of 4% (or more) down days since 1970. 4% down 4% down and bullish From 1970 40 5 On average, a 4% down day

SPY gapped up and closed lower Tuesday after leaving an unfilled up gap on Monday. This triggered a simple study that I have examined a number of times over the years in the subscriber letter. The study can be found below. 2018-02-28 The numbers here all look solidly bullish, suggesting a potential

After 2008, tactical ETF strategies rose in popularity. We often come across advisors who self-implement their own tactical strategies, using simple measures of momentum and trend. We believe that thoughtful implementation of tactical strategies requires admission that tactical choices will be wrong

Factor portfolios do not benefit significantly from intra-month rebalancing However, too infrequent rebalancing leads to lower risk-return ratios The robustness of factor performance at different rebalancing periods is one of the advantages of factor investing INTRODUCTION Creating factor portfolios

I mentioned in a Tweet on Friday that the low volume on Friday’s rally was a bit concerning. The study below is one I featured in the subscriber letter this weekend. It examined other times substantial rallies occurred during uptrends on very light volume. 2018-02-25 Stats here suggest a downside

Giving software you wrote access to your or your firm’s cash account is a scary thing. Making a mistake when manually executing a trade is bad enough when it happens (you can take my word for it if you haven’t yet), but when unintended transactions are made by a piece of software in a tight loop

Recent asset allocation articles (tactical or otherwise) that you might have missed: 40 Shades of Tactical Asset Allocation Across Bull And Bear Markets (Earl Adamy) Earl walks readers though his own approach to finding the best TAA strategies using the data available in our members area. We try not

Factor investing promises outperformance at low cost. But to add value in a portfolio, it must deliver positive risk-adjusted returns and with low correlation to existing holdings. Historically, pure factor exposures have earned similar risk-adjusted returns to buying and holding plain vanilla asset

Following ideas, proposals, pushes and comments similar and disimilar to those, for example, in this post Community - What is the direction of backtrader, the last weeks have been used to craft an idea about the potential future of backtrader. It has been named Algotopian and it’s being shared

Here is a link to our podcast on Behind the Markets Wes and Jeremy chat with Katy Kaminski, Visiting Lecturer in Finance at the MIT Sloan School of Management and co-author of the book, “Trend Following with Managed Futures: The Search for Crisis Alpha.” They discuss trend following and managed

As most of you know my last proper job (part time lecturing and occasional consulting gigs do not count) was managing the fixed income portfolio for AHL, a large systematic hedge fund. I had the pleasure of that job from late 2010 until mid 2013. It's fair to say that the main topic of

What are the research questions To most readers, it’s no surprise that our ears perk up a little bit anytime someone attempts to broaden the understanding of the value anomaly. The precise reason why high book to market equities have higher expected returns has been a long-standing debate among

Survivorship bias is one of the most common biases in finance, and it’s easy to fall victim to it. Let’s find out how to remain vigilant and overcome this hurdle. “History is written by the victors”. – Winston Churchill A cognitive bias is a consequence of subjective judgement. When it

We carry out a study to evaluate and compare the relative performance of the distance and mixed copula pairs trading strategies. Using data from the S&P 500 stocks from 1990 to 2015, we find that the mixed copula strategy is able to generate a higher mean excess return than the traditional

This post will cover two aspects: the first will be a function to convert daily returns into a table of monthly returns, complete with drawdowns and annual returns. The second will be an interview I had with David Lincoln (now on youtube) to talk about the events of Feb. 5, 2018, and my philosophy

What are the research questions? Institutional Investors are increasingly allocating to multi-asset strategies (p.17 ) as they seek to access greater diversity, liquidity, and reduced volatility (survey results from Greenwich Associates, 2015). The main research questions of the paper are as

This is an intraday ES strategy that I was testing for a client. The client was not interested in it due to the low frequency of trades, hence I may post it for others to view. It shows how a strategy was proved through stress testing and looking for optimal conditions to apply the strategy. The

See . This research demonstrates a systematic trading strategy development workflow from theory to implementation to testing. It focuses on the concept of using Gaussian Mixture Models as a method for return distribution prediction and then using a simple market timing strategy to take advantage of

The sequential model ranks stocks by factors sequentially Allows investors to prioritise factors and results in concentrated portfolios However, the factor sequence matters and only a few factors can be considered INTRODUCTION In a recent research report we showed how investors can combine factors

Sunday Feb 18th marks the 10th anniversary of the Quantifiable Edges Subscriber Letter. I can hardly believe I have been writing it for 10 years, but it is true. A few highlights and anecdotes from the last 10 years… · When the letter began, there was not even a website – just a blogspot blog

Does history offer a reason to be cautious on the outlook for stocks if inflation and interest rates are rising? Yes, sort of, according to a New York Times article published on Thursday. Hedging just a bit, the Times piece relates that “it’s long been a truism that higher inflation and its

Spx had a rather long streak of low volatility. There is no predictive value or signal here, i just wanted to eyeball & visualize how long the low vol streak lasted and how it compared to other low vol streaks. Here are all the Spx low vol streaks (close to close change > +/-1%) that lasted

One notable bit of evidence that emerged on Wednesday was the fact that it qualified as an IBD Follow Through Day (FTD). I have done a lot of research on FTDs over the years. Much of that research can be found on the blog. Here is a link. 2018-02-15 The failure rate here is substantial no matter how

A popular method for determining if a strategy should be kept trading is trading the equity curve. What this means we apply an indicator, say 200-day moving average, to the equity curve. When the equity curve falls below this value we stop trading. We then continue to paper trade the strategy until

Forecasting the market or the outcome of a gamble is important. Deciding how much to invest or bet based on how confident you are about the prediction is similarly as important. But don’t let the pressure get to you; the Kelly criterion is here to help us make this decision. Betting with the Kelly

This paper examines price overreactions in the case of the following cryptocurrencies: BitCoin, LiteCoin, Ripple and Dash. A number of parametric (t-test, ANOVA, regression analysis with dummy variables) and non-parametric (Mann–Whitney U test) tests confirm the presence of price patterns after

Dollar-cost averaging (DCA) versus lump sum investing (LSI) is often a difficult decision fraught with emotion. The historical and theoretical evidence contradicts the notion that DCA leads to better results from a return perspective, and only some measures of risk point to benefits in DCA. Rather

Intra versus cross-sector Value portfolios share the major trends Neutralising the sector exposure increases the risk-return ratio of the Value factor However, the benefits are marginal and come with higher operational complexity INTRODUCTION 2018 started almost identical to 2017 in terms of factor

The sizable gap up, pullback, and then move back higher on Friday triggered an old Quantifinder study for the 1st time in a long time. Below is the full list of trades with a 5-day holding period. 2018-02-11 All 8 instances saw run-ups of at least 1%, and they all closed positive. While instances

What are the research questions? This research focuses on the relationship between the frequency of unexpected short selling behavior and abnormal returns surrounding credit watch and rating change announcements in the equity market. It is notable that it employs a unique database that affords the

Traditional capital structure theory in frictionless and efficient markets predicts that reducing banks’ leverage reduces the risk and cost of equity but does not change the overall weighted average cost of capital (and thus the rates for borrowers). We test these two predictions. We confirm that

I have discussed some lately that the market is acting outside of historical norms. Thursday’s action reinforced that. The pullback has come so fast and been so extreme that it is going beyond even many of the most extreme moves in similar situations. For instance, I looked back to 1960 with the

Similar to some better-known factors like size and value, time-series momentum is a factor which has historically demonstrated above-average excess returns. Time-series momentum, also called trend momentum or trend-following, is measured by a portfolio which is long assets which have had recent

Short-term reversals, including intraday and monthly reversals, are well-known in academic literature and are observable in the markets every day. This phenomenon persists across many different asset classes, especially stocks. There are many theories to explain this phenomenon. Some say the

The recent plunge in the US stock market ended the extended run of tranquility in equity returns. The media’s metric of choice to cite this change is the CBOE Volatility Index, or VIX, which surged earlier this week to the highest level in nearly three years, based on daily data. The upward

Thought you knew everything about correlation? Think there’s no fooling you with the question of correlation with financial prices or returns? Well maybe, just maybe, this post will enlighten you. Correlation: the debate is on Correlation can be a controversial topic. Things can go awry when two

How can machine investors beat humans? In the introductory chapter of his January 2018 book entitled “Financial Machine Learning as a Distinct Subject”, Marcos Lopez de Prado prescribes success factors for machine learning as applied to finance. He intends that the book: (1) bridge the divide

This is the fourth in a multi-part series in which we explore and compare various deep learning tools and techniques for market forecasting using Keras and TensorFlow. In Part 1, we introduced Keras and discussed some of the major obstacles to using deep learning techniques in trading systems,

What are the research questions? Despite Peter Bernstein’s suggestion in 2003 that adherence to a fixed and undiversified policy portfolio is dangerous, benchmarks ( the most used of which is the 60/40) are as popular today as they were 15 years ago. The authors study the following research

The State of Trend Following index starts the year with a strong performance to bounce back from the 2017 lows. Please check below for more details. Detailed Results The figures for the month are: January return: 7.25% YTD return: 7.25% Below is the chart displaying individual system results