Opex week in January is one that the market has seen some struggles over the last 19 years. Below is the list of January op-ex weeks from 1999 – 2017 with their full week performance results. There have been 8 years in which January op-ex week occurred in conjunction with Martin Luther King Day.

Long-short multi-factor portfolios generate attractive returns before fees Returns are much less attractive post fees charged historically However, some fees in the long-short space are likely justified given higher complexity INTRODUCTION Reality is the murder of a beautiful theory by a gang of

This post will demonstrate how to replicate the volatility ETNs (XIV, VXX, ZIV, VXZ) from CBOE futures, thereby allowing any individual to create synthetic ETF returns from before their inception, free of cost. So, before I get to the actual algorithm, it depends on an update to the term structure

In the last post, we covered Pairs trading strategy and demonstrated how to leverage data and mathematical analysis to create and automate a trading strategy. Long-Short Equity Strategy is a natural extension of Pairs Trading applied to a basket of stocks. Download Ipython Notebook here. Underlying

One compelling study from last night’s Quantifinder suggested the recent persistent upmove is unlikely to abruptly end. (This is a theme we have seen many times over the years.) It considers what happens after the market moves up at least 5 days in a row to a 50-day high, and then pulls back. I

This blog post is a revised edition of Tom’s original blog post with a newer data set. More information, source code & inspiration can be found here. Code for this blog post is in our Github repository. Options are complex instruments with many moving parts. Specifically, options are contracts

A mean reversion strategy I trade was developed with another researcher. This strategy enters on a further intraday weakness with a limit order and typically exits a few days later when the stock bounces. Recently this researcher sent me and email saying “Try the strategy as a day trade. Enter at

Our site serves a lot of purposes for tactical asset allocation (TAA) investors: curating the best published strategies, testing those strategies with superior historical data, providing the ability to combine strategies into custom portfolios, and tracking even the most complex strategies in near

Imagine you’re looking for variables that predict the cross-section of expected returns. No search process is perfect. So, as you work, you will inevitably uncover both tradable anomalies as well as spurious correlations. To figure out which are which, you regress returns on each variables that

On the back of our recent event in New York, we are bringing the big data & machine learning revolution to London this April 24th. Register to receive updates on the agenda! Register Now The London Revolution More than 750 finance professionals registered to attend the New York Revolution but we

The tenth annual R/Finance conference for applied finance using R will be held June 1 and 2, 2018 in Chicago, IL, USA at the University of Illinois at Chicago. The conference will cover topics including portfolio management, time series analysis, advanced risk tools, high-performance computing,

It has been well-documented that value stocks have provided higher expected returns than growth stocks. However, there is a great debate about the source of that premium: Is it risk-based or is it related to behavioral errors that create persistent mispricings? There are many papers presenting

Near-perfect neutral month for the State of Trend Following index to close the year just in negative double-digit territory. 2017 was not the best year for the strategy. Let’s see what 2018 has in store. Happy new year to all readers and best wishes for profitable trading. Please check below for

What are the research questions? Is the rate of turnover for outside directors unusually high either before fraud is discovered by the firm, or during its commission? Are there regularities in the characteristics of outside directors who depart during the period in which the financial fraud is

We believe that capital efficiency should remain a paramount objective for investors. The prudent use of leverage can help investors employ more risk efficient portfolios without necessarily sacrificing potential returns. Many investors, however, do not have access to leverage (be it via borrowing

FactorResearch publishes a white paper on building multi-factor models. SUMMARY Three common approaches for creating multi-factor portfolios are the Combination, the Intersectional and the Sequential models The results from the Combination and Intersectional models are comparable in terms of trend

The simple fact that the SPX posted a gain on the first 4 days of the year is a pretty rare occurrence, with 2018 only being the 9th instance since 1961. While instances have been low, the intermediate-term performance following such strong starts to the year has been impressive. And looking at most

This is the second 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,

It is that time of year again, the American Finance Association Annual Meeting is underway. The conference is in Philadelphia, starting today (January 5) and running through Sunday (January 7). This 3-day conference has 73 sessions, 246 papers and 12 presentations with no papers (general

We have just published a white paper showcasing the benefits of hedging a sentiment signal using risk factors from several MSCI Barra Risk Models. In this post, I provide some details on the methodology used for the strategy and on the achieved results. Excess returns: Ignores several risk factors

A few weeks ago, we did a deep dive into the factors versus characteristics debate. One of the reasons we’ve brought up this debate is due to the fact that “factor” loadings (from regressions) are arguably not as helpful as portfolio characteristics. In other words, knowing a portfolio P/E

As traders, we of course need money to make money, but not everyone has 10-50k of capital lying around to start one's trading journey. Perhaps the starting capital is only 1k or less. This article describes how one can take a small amount of capital and multiply it as much as 10 fold in one

Back in June of 2016, I wrote this post about random entries and trailing exits. It turns out (on average) that you can beat buy-and-hold of the S&P 500 by simply buying members of the S&P 100 randomly, as long as you a) have a market-timing filter, and 2) have a trailing stop of 20%. Yes

The “January effect,” in common with the “Halloween indicator” and “sell in May and go away”, is a catchy, get-rich-quick investment idea adored by financial commentators because it is so easy to explain to unsophisticated readers. It rests on the claim that the U.S. stock market

Last night’s subscriber letter featured (an expanded version of) the following study, which looks at performance in the 1st couple of days following a positive 1st day of a new year. 2018-01-03 The stats and curve all suggest some immediate follow-through has been typical. There have now been 9

Deep learning is an active area of research in machine learning. I train deep feedforward neural networks (DFN) based on a set of 68 firm characteristics (FC) to predict the US cross-section of stock returns. After applying a network optimization strategy, I find that DFN long-short portfolios can

Blogging was light in December. We spent the month working on the launch of a new fintech project that many of our readers will be excited about. We’ll be sharing details in the coming month and getting back to our regular blogging and site development schedule. — Allocate Smartly This is a

In statistics, the null hypothesis is the default statement that you test with data. From this test, you can either reject the null hypothesis in support of an alternative or assert that there is not enough evidence to believe anything other than the null hypothesis with a certain degree of

2017 was a positive year for most factors Quality, Growth and Momentum showed the strongest performance Value, Dividend Yield and Size generated negative returns INTRODUCTION We present the performance of seven well-known factors on an annual basis for the last 10 years and the full-year 2017. It is

In the last few years, deep learning has gone from being an interesting but impractical academic pursuit to an ubiquitous technology that touches many aspects of our lives on a daily basis – including in the world of trading. This meteoric rise has been fuelled by a perfect storm of: Frequent

In the previous post, we looked at some statistical properties of the empirical distributions of spot SPX and VIX. In this post, we are going to investigate the mean reverting and trending properties of these indices. To do so, we are going to calculate their Hurst exponents. There exist a variety

So many research papers, so little time. How do you separate the wheat from the chaff? You might start with the following five economic and financial papers that appeared in The Capital Spectator’s Research Review column in 2017. In a sea of newly minted studies over the past 12 months, these

Conventional wisdom can be defined as ideas that are so accepted that they go unquestioned. Unfortunately, conventional wisdom is often wrong. Two great examples are that millions of people once believed the conventional wisdom that the Earth is flat, and millions also believed that the Earth is the

This paper examines persistence in the cryptocurrency market. Two different longmemory methods (R/S analysis and fractional integration) are used to analyse it in the case of the four main cryptocurrencies (BitCoin, LiteCoin, Ripple, Dash) over the sample period 2013-2017. The findings indicate that

Since December, bitcoins can not only be traded at more or less dubious exchanges, but also as futures at the CME and CBOE. And already several trading systems popped up for bitcoins and other cryptocurrencies. None of them can claim big success, with one exception. There is a strategy that easily

What are the research questions? Given the prevalence of buybacks as a form of corporate payouts, should they be explicitly included in supply-side models such as the dividend discount model (DDM) used to forecast of stock returns? Does the same superior performance extend to the prediction of

Yesterday I decided to examine performance of XIV during the last few days of the year. The thought was that we are now in a time period that is generally regarded as seasonally bullish. Additionally, volume and volatility are often light this week with many traders on vacation. So I thought with

An investment in knowledge pays the best interest. (Benjamin Franklin) December 2017. Reading Time: Several hours. Author: FactorResearch. SUMMARY Contains 34 research papers that we published on FactorResearch.com in 2017 Focus on factor investing and quantitative strategies from an investor’s

Well here we are, another year gone (and so fast too!). I’m glad you could join me for this final episode for 2017, where we’ll be reviewing all of the special guests we had on the show this year, the topics and insights they’ve shared plus their top trading lessons. I think this is a great

During a time of year that is renowned for its low volatility and bullish seasonality, one might think XIV would have some strong historical returns. Well… 2017-12-25 …one would be wrong. Happy Holidays anyway!

Put that machine learning tutorial down. Machine learning is for closers only. As some of you that were around back in the early of this blog may know, I always held high hopes for the application of machine learning (ml) to generate trading edges. I think like many people first coming across

Strategy: core directional choices that best best moves you into your desired future Tactics: specific actions that will best implement your strategies Without a core strategy to anchor all tactics suggestions to see which best FIT (feasible, impactful, timely) the strategy, one could randomly

There has been much discussion of the small-cap premium recently. Has its popularity cannibalized its utility? Are large firms preventing a level playing field? Will the small-cap premium exist going forward? This article does not address these concerns directly, but it does identify and analyze

This post will be about investigating the efficacy of contango as a volatility trading signal. For those that trade volatility (like me), a term you may see that’s somewhat ubiquitous is the term “contango”. What does this term mean? Well, simple: it just means the ratio of the second month of

The academic research has generally found valuations, such as the earnings yield (E/P) (or the CAPE 10 earnings yield) and valuation spreads, have predictive value in terms of future returns. The higher the earnings yield, the higher the expected return, and the larger the spread in valuations

Carry trade returns vary across fixed and floating currency regimes. Over the last century, outsized carry returns occur exclusively in the floating regime, being zero in the fixed regime. The absence of skewness in floating carry returns rules out a skewness-based explanation for this result.

Is it possible to foresee the future movements of a stock? Let’s use Machine Learning techniques to predict the direction of one of the most important stock indexes, the S&P 500. Pregaming The Standard & Poor’s 500 (S&P500) is a stock market index based on the capitalization of the

Trend-following is something I’ve struggled with for years — always felt like voodoo magic and data-mining. That said, I finally came around to appreciating the practice after a ton of research replication efforts, independent research. At the time I was investigating the topic there really

Are cryptocurrencies potentially useful portfolio diversifiers? In their November 2017 paper entitled “Exploring the Dynamic Relationships between Cryptocurrencies and Other Financial Assets”, Shaen Corbet, Andrew Meegan, Charles Larkin, Brian Lucey and Larisa Yarovaya apply a battery of tests

Pairs trading is a nice example of a strategy based on mathematical analysis. We’ll demonstrate how to leverage data to create and automate a pairs trading strategy. Underlying Principle Let’s say you have a pair of securities X and Y that have some underlying economic link, for example two