Quant Mashup Why You Need Independent Verification of Strategy Results [Allocate Smartly]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(...) How Bad Are False Positives, Really? [Alex Chinco]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(...) Big Data and Machine Learning Conference in London [Raven Pack]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(...) R/Finance 2018: Call for Papers [Foss Trading]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,(...) The Value Effect and Macroeconomic Risk [Alpha Architect]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(...) State of Trend Following in December [Au Tra Sy]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(...) Yes, Departing Outside Directors Are Aware of Fraud Before They Resign [Alpha Architect]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(...) Levered ETFs for the Long Run? [Flirting with Models]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(...) Multi-Factor Models 101 [Factor Research]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(...) Historical Results Following 4 Up Days To Begin A New Year [Quantifiable Edges]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(...) Deep Learning for Trading Part 2: Configuring TensorFlow and Keras to run on GPU [Robot Wealth]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,(...) Academic Research Papers and Presentations Galore! [Alpha Architect]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(...) Beyond Excess Returns: How to Enhance Sentiment Strategies using MSCI Barra Risk Models [Raven Pack]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(...) Predicting Stock Returns Using Firm Characteristics [Alpha Architect]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(...) A novel capital booster: Sports Arbitrage [EP Chan]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(...) All About the Exits…Revisited [Throwing Good Money]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(...) Can the January effect be exploited in the market? [Mathematical Investor]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(...) When A New Year Starts On A Positive Note [Quantifiable Edges]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 Insights for Factor Investing [Quantpedia]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(...) Tactical Asset Allocation in December [Allocate Smartly]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(...) A Null Hypothesis for the New Year [Flirting with Models]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(...) Factor Olympics 2017 [Factor Research]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(...) Deep Learning for Trading: Part 1 [Robot Wealth]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(...) Mean Reverting and Trending Properties of SPX and VIX [Relative Value Arbitrage]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(...) Best of Research Review 2017 [Capital Spectator]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(...) The Tax Efficiency of Long-Short Strategies [Alpha Architect]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(...) Persistance in Cryptocurrencies [Quantpedia]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(...) Deep Learning Systems for Bitcoins – Part 1 [Financial Hacker]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(...) Predicting Long Run Stock Returns? It's All About the Payouts and the Real Economy [Alpha Architect]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(...) A Not-so Merry VIX-mas Part 2 [Quantifiable Edges]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(...) Research Compendium 2017 [Factor Research]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(...) Podcast: 2017 roundup: the year in review [Better System Trader]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(...) A Not-So Merry Vix-mas [Quantifiable Edges]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! Machine learning is for closers [Quantum Financier]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(...) The Art of War: How to beat a strategist in the futures market? [No Noise Only Alpha]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(...) Stock Misplacement in Sized-Based Indices [Alpha Architect]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(...) (Don’t Get) Contangled Up In Noise [QuantStrat TradeR]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 Returns to Value Strategies When Valuation Spreads Are Wide (Deep Value) [Alpha Architect]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 Across Fixed and Floating Currency Regimes [Quantpedia]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.(...) Forecasting S&P 500 using Machine Learning [Quant Dare]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(...) Book Review - Market Timing with Moving Averages [Alpha Architect]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(...) Cryptocurrencies vs. Other Asset Classes [CXO Advisory]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 using Data-Driven Techniques: Simple Trading Strategies Part 3 [Auquan]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(...) Industry Herding by Short Sellers Signals that Conditions are Changing [Alpha Architect]Does the industry concentration exhibited in short sellers’ holdings convey new material information about the industry? Are the excess returns obtained from industry shorting combined with firm-specific shorting strategies explained by risk? Is the industry shorting signal correlated with(...) Value 2.0 [Flirting with Models]Traditional value strategies simply sort the investment universe based on one or more valuation metrics (e.g. book-to-market, price-to-earnings, etc.) and purchase the securities that look the cheapest. However, this process is often prone to structural sector bets, which are uncompensated sources(...) Factor Returns: Year-End Calendar Effects [Factor Research]Value & Size generate abnormally large positive returns in January, Momentum negative returns Abnormal returns are limited to the last week of December and first week of January Difficult to harvest these returns efficiently due to illiquidity of markets at these times INTRODUCTION At this time(...) Machine Learning Classification Strategy In Python [Quant Insti]In this blog, we will step by step implement a machine learning classification algorithm on S&P500 using Support Vector Classifier (SVC). SVCs are supervised learning classification models. A set of training data is provided to the machine learning classification algorithm, each belonging to one(...) Pricing Arithmetic Asian Options using Moment Matching [Top of The Bell Curve]Asian options are path-dependent options whose payoff depends on the average value of the underlying asset during a specific set of dates across the life of the option. Because the payoff of the Asian options depends on the average value of the underlying asset, volatility in the average value is(...) Are Recent S&P 500 Returns Excessive Relative To History? [Capital Spectator]The US stock market has been on a tear lately. Has the party gone too far? A rising chorus of analysts say that caution is advised, citing several valuation metrics. The Shiller PE Ratio, for instance, is currently at its second-highest level since the late-1800s. Valuations appear stretched, but(...) Podcast: Founding Alpha Architect [Alpha Architect]Here is a link to our recent podcast on Behind the Uniform. I’m so humbled and honored to have Wesley Gray on the show today, talking about his experience building Alpha Architect. I found Wes through a Wall Street Journal article that starts with: “Wesley Gray’s value-focused fund of overseas(...)