Quant Mashup False Promises: Going Passive is Not Momentum Investing [Factor Investor]There is some popular marketing spin going around that indexing—constructing portfolios based on market-cap weights—is effective because it allows an investor to own more of companies that have been successful and appreciated, while moving away from losers that have been unsuccessful and(...) The 52 Week High and the Q-Factor Investment Model [Alpha Architect]In the past, we have examined the following two topics: (1) stock performance & the 52-week high and (2) the investment CAPM. When examining the performance of stocks relative to their respective 52-week high (highlighted by us here), the authors (George and Hwang) find the following: When(...) A New Book For Portfolio Analysis Using R [Capital Spectator]Later this month I’ll be publishing my third book: Quantitative Investment Portfolio Analytics In R: An Introduction To R For Modeling Portfolio Risk and Return. Although there are already many R books on the market, this one serves a particular niche: a short guide for recovering Excel addicts(...) State of Trend Following in May [Au Tra Sy]Positive May return for the State of Trend Following, with a YTD performance slightly negative. Please check below for more details. Detailed Results The figures for the month are: May return: 1.48% YTD return: -2.38% Below is the chart displaying individual system results throughout May: StateTF(...) Help Fight MS and Receive Research & More From Quantifiable Edges [Quantifiable Edges]Last year Quantifiable Edges readers helped me raise over $4000 for Multiple Sclerosis (MS), and this year I am upping the incentive for people to donate! I am happy for any size donation, but I have created 2 donation levels this year so that people are incented to give more: Thank You Level: One(...) RSI2 (Relative Strength Index) Analysis [Alvarez Quant Trading]From my time with working with Larry Connors, I have become known for using the 2-Period RSI (RSI2) (Relative Strength Index) in my trading. I have written lots of blog posts that use it and I often use it in my personal strategies. One thing I like to do with indicators that I use frequently is a(...) Hedge Fund Return Predictability [Rayner Gobran]This is the sixth in my Hedge Fund Hacks series. In this post, I hammer home how little we know about the expected returns of a hedge fund or a managed futures strategy because we have so little data. You will learn just how large the uncertainty is and what you can do about it. Glimpses Through the(...) New video explains the danger of selection bias in finance [Mathematical Investor]A new video has been produced by the Mathematicians Against Fraudulent Financial and Investment Advice (MAFFIA) group. It explains, in simple terms, how many of the financial strategies and funds available today are based on a statistically dubious foundation, typically rooted in selection bias(...) Fun with the Cryptocompare API [Robot Wealth]Cryptocompare is a platform providing data and insights on pretty much everything in the crypto-sphere, from market data for cryptocurrencies to comparisons of the various crytpo-exchanges, to recommendations for where to spend your crypto assets. The user-experience is quite pleasant, as you can(...) Labeling and Meta-Labeling Returns for ML Prediction [Black Arbs]This post focuses on Chapter 3 in the new book Advances in Financial Machine Learning by Marcos Lopez De Prado. In this chapter De Prado demonstrates a workflow for improved return labeling for the purposes of supervised classification models. He introduces multiple concepts but focuses on the(...) Estimating the Hurst Exponent Using R/S Range [Flare 9x]In this post we will estimate the Hurst exponent using the R/S method. The Hurst exponent determines the long range memory of a time series (more below). If a series has no memory ie if each point in time is independent from previous points in time then its said to be more of a random process.(...) Commodities for the Long Run [Alpha Architect]The paper investigates this issue by answering the following research questions: Are commodities returns positive on average? How do they vary in different economic states (backwardation/contango; expansion/recession periods; unexpected inflation) ? How have they contributed to a broad portfolio?(...) Better Returns From Seasonal Investing In The S&P 500 (1950-2018) [iMarketSignals]From 1950 to 2018 the S&P 500 performed best from November to April, and significantly worse from May to October during most years. From 1950-2018 the real annualized return for the S&P 500 was 6.71%. Had one only invested from November to April each year the return would have been 6.60%,(...) The Siren of Statistics [Highly Evolved Vol]A siren was a mythological being who lured sailors with their enchanting music to shipwreck on the rocky coasts of their island. Their songs were almost impossible to resist. But more generally a “siren” is a bad thing that we are attracted to, either physically or psychologically. For(...) Factor Fimbulwinter [Flirting with Models]Value investing continues to experience a trough of sorrow. In particular, the traditional price-to-book factor has failed to establish new highs since December 2006 and sits in a 25% drawdown. While price-to-book has been the academic measure of choice for 25+ years, many practitioners have begun(...) Skewness as a Factor [Factor Research]Skewness is a feature of stocks with high firm-risks Stocks with positive or negative skewness outperform the market Can partially be explained by the Size factor INTRODUCTION Many investors started their investment career at an early age, typically buying a stock that showed an enticing performance(...) The Future for Factor Investing May Be Different Than its Backtested Past [Alpha Architect]We believe there are cause and effect relationships in the world — and in investing — that hold true over time. Many are common sense and easily observable – like fire creates smoke – while others are harder to see and understand. With factor investing, true relationships can be hard to see(...) FX carry strategies (part 1) [SR SV]FX forward-implied carry is a valid basis for investment strategies because it is related to policy subsidies and risk premia. However, it also contains misdirection such as rational expectations of currency depreciation. To increase the signal-noise ratio FX carry should – at the very least –(...) Kelly versus Classical portfolio theory, and the two kinds of uncertainty premium [Investment Idiocy]Since I was a young lad there has been an ongoing fight in Financial Academia 'n' Industry between two opposing camps: In the red corner are the Utilitarians. The people of classical finance, of efficient frontiers, of optimising for maximum return at some level of maximum risk. In the(...) Update on Improved Currency Strength Indicator [Dekalog Blog]Following on from my previous post I have now slightly changed the logic and coding behind the idea, which can be seen in the code snippet below Essentially the change simultaneously optimises, using Octave's fminunc function, for both the gold_x and all currency_x geometric multipliers(...) Machine Learning for Financial Market Prediction With Sklearn and Keras [Alpha Architect]Recently, Wes pointed me to this interesting paper by David Rapach, Jack Strauss, Jun Tu and Guofu Zhou: “Dynamic Return Dependencies Across Industries: A Machine Learning Approach.” The paper presents a strategy that forecasts industry returns and shows excellent historical returns. In this(...) Tactical Asset Allocation in May [Allocate Smartly]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 Strength Of Two Unfilled Up Gaps & A 50-Day High [Quantifiable Edges]One interesting study that I discussed in last night’s subscriber letter considered the fact that SPY left an unfilled upside gap for the 2nd day in a row while closing at a 50-day high. The results table I shared can be found below. 2018-06-05 The size of the follow-through isn’t terribly(...) Currency Management with FX Style Factors [Quantpedia]Currency hedging is often approached with an all-or-nothing mentality: either full hedging of all foreign exchange (FX) positions or no hedging at all. As a more nuanced alternative, we suggest systematically harvesting the benefits of the FX style factors carry, value and momentum. In particular,(...) ETF Rotation Strategies in Zorro [Robot Wealth]At Robot Wealth we get more questions than even the most sleep-deprived trader can handle. So whilst we develop the algo equivalent of Siri and brag about how we managed to get 6 hours downtime last night, we thought we’d start a new format of blog posts — answering your most burning questions.(...) A Season for Sectors [Flirting with Models]Seasonality is an effect that shows up in data but is difficult to justify from a theoretical perspective using behavioral, risk-based, or structural reasoning. However, diving deeper into the effect within the U.S. sectors, we find that seasonality has been economically significant and surprisingly(...) The Inconsistent Performance of Value and Size Factors in the Chinese A-Share Market [Alpha Architect]What are the research questions? Does the Fama-French “size” factor explain the cross-section of stock returns in the Chinese A-share market? Does the Fama-French “value” factor explain the cross-section of stock returns in the Chinese A-share market? What are the Academic Insights? YES. The(...) Factors from Scratch with Philosophical Economics (@Jesse_Livermore)With a million dollars to invest today, would you rather buy a portfolio of New York City taxi medallions or shares in Uber stock? When we ask investing audiences this question, the answer is almost always Uber. People tend to think in terms of fundamental growth without also thinking about price.(...) Market Timing with Multiples, Momentum and Volatility [Factor Research]Equity multiples have been elevated in recent years Using valuation multiples for allocation decisions is a challenging strategy Momentum and volatility-based strategies are more attractive INTRODUCTION In recent years the stock market in the US has been expensive on a variety of valuation(...) Kalman Filter Techniques And Statistical Arbitrage In China's Futures Market In Python [Quant Insti]This article is the final project submitted by the author as a part of his coursework in Executive Programme in Algorithmic Trading (EPAT™) at QuantInsti®. Do check our Projects page and have a look at what our students are building. About the Author Xing Tao is a Bachelor in Computer Science(...) Sharpe Ratio > 1 : Careful What You Wish For [Quantum Financier]I had the pleasure to hang out with the good folks over at Resolve Asset Management recently. Part of our discussion centered around the differences between our two worlds. As you can imagine, prop trading is fairly different from institutional asset management. A topic of particular interest to(...) Shapley Value Allocation of Operational Risk Capital Charges using Airport Problem Solution [Quant At Risk]In Financial Risk Management the most challenging part for quantitative modeling is, beyond any doubt, the Operational Risk (Ops Risk). It is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal(...) A simple rule for exchange rate trends [SR SV]Over the past decades developed market exchange rates have displayed two important regularities. First, real exchange rates (nominal exchange rates adjusted for domestic price trends) have been mean reverting. Second, the mean reversion has predominantly come in form of nominal exchange rate trends.(...) Factor Regressions Problems and How to Fix Them [Alpha Architect]Factor Regressions are one way to ascertain a fund’s exposure to certain factors that an investor/advisor may want to allocate towards, such as Value, Momentum, Quality, etc. Luckily, there are some great free tools available online, such as portfoliovisualizer.com, that allows investors to run(...) The Big Data and Machine Learning Revolution: Event takeaways, slides & videos [Raven Pack]More than 600 finance professionals registered to attend the London Revolution. An excellent group of top finance professionals shared their latest research and experience with big data and machine learning. The event took place on April 24, 2018 at the Banking Hall, one of the most exquisite venues(...) Sharpening the Arithmetic of Active Management [Alpha Architect]For many investors, the superiority of passive investing over active investing is axiomatic (Earth to passive investors; Lunch is never free!) And why not? Study after study has demonstrated that only a small portion of actively managed funds beat their benchmarks over long time frames. A recent(...) Style Investing in Fixed Income [Alpha Architect]The paper investigates this issue by answering the following research questions: Can common robust risk premia (value, momentum, carry and defensive) enhance returns in Fixed Income investing? Do style-based Fixed Income portfolios present diversifying potential? Is a long/short implementation(...) Dollar-Cost Averaging: Improved by Trend? [Flirting with Models]The choice to lump sum invest (“LSI”) or dollar-cost average (“DCA”) is one fraught with emotion. Intuition tells us that LSI likely offers the best bet for long-term investors as markets, in general, tend to go up. However, can signals derived from simple trend models offer an edge? We find(...) How Seasonality The Week Of Memorial Day Has Changed Over The Years [Quantifiable Edges]Happy Memorial Day! The week of Memorial Day has shown some interesting seasonal tendencies over the years. But it has faltered greatly the last few. The chart below is one I have shown in the past, and have now updated. It examines SPX performance from the Friday before Memorial Day to the Friday(...) Short-Term Return Reversals and Intraday Transactions [Quantpedia]I examine whether a short-term reversal is attributed to past intraday or overnight price movements. The results show that intraday returns significantly reverse in the following week, while overnight returns do not, indicating that the short-term reversal is attributed to past intraday price(...) Tactical Mean-Reversion [Factor Research]The Mean-Reversion factor is driven by volatility Allocating tactically when volatility is high generates an attractive payoff profile The strategy can be considered as a tail risk hedge for equity portfolios INTRODUCTION Our most recent research note focused on the Mean-Reversion factor (please see(...) An Improved Currency Strength Indicator plus Gold and Silver Indices? [Dekalog Blog]In the past I have blogged about creating a currency strength indicator ( e.g. here, here and here ) and this post talks about a new twist on this idea. The motivation for this came about from looking at chart plots such as this, which shows Gold prices in the first row, Silver in the second and a(...) Investor Attention and the Low Volatility Anomaly [Alpha Architect]One of the big problems for the first formal asset pricing model developed by financial economists, the Capital Asset Pricing Model (CAPM), was that it predicts a positive relationship between risk and return. However, the historical evidence demonstrates that while the slope of the security market(...) Research Review | 25 May 2018 | Business Cycle Risk [Capital Spectator]Is Fertility a Leading Economic Indicator? Kasey Buckles (University of Notre Dame), at al. March 28, 2018 Many papers show that aggregate fertility is pro-cyclical over the business cycle. In this paper we do something else: using data on more than 100 million births and focusing on within-year(...) Trading the Equity Curve – More Ideas [Alvarez Quant Trading]A couple posts ago, I looked at Trading the Equity Curve and found interesting results but nothing that made me decide this works for me. Using the equity curve to decide when to stop trading a strategy just sounds like it should work. But for me it is always about testing. I cannot count how often(...) Using Quadratic Discriminant Analysis To Optimize An Intraday Momentum Strategy [Quant Insti]In this post, we will create an intraday momentum strategy and use QDA as a means of optimizing our strategy. We’ll begin by reviewing Linear Discriminant Analysis or LDA and how it is associated with QDA, gain an understanding of QDA and when we might implement this technique instead of Linear(...) Dimensions of Return [Factor Investor]There are three universal dimensions of return that drive the performance of all strategies—regardless of investment style or asset class: consistency, magnitude, and conviction. These dimensions serve as levers that can increase or decrease performance of any strategy. They also provide context(...) What to do with Underperforming Investments? Assessment via Bayesian Inference [Alpha Architect]Assume you made a decision to invest in an active strategy based on, say, a backtest of the underlying process (to be clear, active means NOT passive market-cap weight in my context). Over the next few years, you sit in the strategy watching it underperform the passive benchmark. You are a(...) Interesting Insights into Trend-Following Strategies [Quantpedia]Because of the adaptive nature of position sizing, trend-following strategies can generate the positive skewness of their returns, when infrequent large gains compensate overall for frequent small losses. Further, trend-followers can produce the positive convexity of their returns with respect to(...) Biclustering time series [Quant Dare]In this post, we’ll take a brief look at biclustering algorithms. They reveal easily interpretable patterns in our data and give us more information about the links between observations and features than simpler clustering algorithms usually do. We’ve already reviewed a number of non-supervised(...)