Quant Mashup Do you have a plan for your screw ups? [Alvarez Quant Trading]You should have a plan for when you screw things up because I can guarantee it will happen. This is the screw up I did last night and how I handled it this morning. Enjoy this unplanned post. The Nightly Ritual Each night for 250 days of the year, I do the following for my trading. Step 1: In the(...) Time Series Analysis for Financial Data VI— ARCH and GARCH models [Auquan]In this mini series on Time Series modelling for Financial Data, so far we’ve used AR, MA and a combination of these models on asset prices to try and model how our asset behaves. We’ve found that we were able to model certain time periods well with these models and failed at other times. This(...) Hierarchical clustering of Exchange-Traded Funds [Quant Dare]Clustering has already been discussed in plenty of detail, but today I would like to focus on a relatively simple but extremely modular clustering technique, hierarchical clustering, and how it could be applied to ETFs. We’ll also be able to review the python tools available to help us with this.(...) Iron Condor Results Summary - Part 6 - IC Returns vs Initial Conditions Correlation [DTR Trading]In the last article, we looked at correlations between Iron Condor returns and Iron Condor structures / trade management. Specifically, we started with the following list of areas to investigate: Correlation between Iron Condor strategy structure / management and result metrics Which result metrics(...) How is big data impacting the finance world? [Mathematical Investor]“Big data” is already a frequently-heard buzzword, both in the business analytics arena, but also in the field of high-performance scientific computing. Basically, “big data” encompasses the collection, processing, indexing and utilization of large-scale datasets. Some concrete examples(...) Free Bitcoin/Bitcoin Futures Quotes & Charts [Six Figure Investing]Finding quotes and historical data for Bitcoin and Bitcoin futures can be an adventure. Below I’ve assembled links to the online resources that I’ve been able to find. In many cases, data is available from multiple sources. I did not attempt to list all of them. BTC Quotes Yahoo Finance(...) FX Momentum Explained via Dispersion Risk [Quantpedia]This paper studies the relation between global foreign exchange (FX) return dispersion risk and the cross-section of currency momentum returns. We find robust empirical evidence that FX return dispersion is a priced risk factor and that it contains information beyond traditional factors. Currencies(...) Beware of the Surprise Departure of Independent Directors! [Alpha Architect]What are the research questions? What are the general circumstances associated with independent director departures? Is it possible to identify situations whereby the departure is unexpected and not due to retirements, director outside commitments or firings by the firm? Are the unexpected or(...) No Silver Bullets: 8 Ideas for Financial Planning in a Low-Return Environment [Flirting with Models]Most institutions are forecasting lower expected returns for traditional asset classes compared to historical realized levels. Rules based upon historically realized numbers – like the 4% withdrawal rule – may fail going forward. Should we simply accept lower withdrawal rates in our financial(...) Mean-Reversion on Equity Index Level [Factor Research]Mean-Reversion on index level became profitable post the 1970s, before that Momentum dominated The structural shift from Momentum to Mean-Reversion is consistent across markets Likely explained by the evolution of financial markets INTRODUCTION Investors and traders basically only have two options(...) The Most Wonderful Week Of The Year [Quantifiable Edges]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(...) Time Warp Edit Distance [Dekalog Blog]Part of my normal routine is to indulge in online research for use useful ideas, and I recently came across An Empirical Evaluation of Similarity Measures for Time Series Classification, and one standout from this paper is the Time Warp Edit Distance where, from the conclusion, "...the TWED(...) Momentum and Market Anomalies [Alpha Architect]Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at least for a short period of time. Initial research on momentum was published by Narasimhan Jegadeesh and Sheridan Titman, authors of the 1993 study,(...) Research Review | 8 December 2017 | Momentum Investing [Capital Spectator]Implementing Momentum: What Have We Learned? Adrienne Ross (AQR Capital Management), et al. December 2017 An abundance of academic evidence and theory exists on the efficacy and intuition behind momentum investing, yet a limited number of studies discuss the feasibility of running momentum(...) November 2017 Trend Following [Wisdom Trading]November 2017 Trend Following: DOWN -0.61% / YTD: -15.45% Please find below the latest edition of the Wisdom State of Trend Following as of last month. Performance is hypothetical. Chart for November: Wisdom State of Trend Following - November 2017 And the 12-month chart: Wisdom State of Trend(...) State of Trend Following in November [Au Tra Sy]November was down for the index, sitting just below the negative double-digit line before year-end. It looks like the State of TF will end in the red in 2017, unless a strong bitcoin-inspired December rally lifts the index back in the black. Please check below for more details. Detailed Results The(...) Time Series Analysis for Financial Data V — ARIMA Models [Auquan]In the previous posts in this series, we combined the Autoregressive models and Moving Average models to produce Auto Regressive Moving Average(ARMA) models. We found that we were still unable to fully explain autocorrelation or obtain residuals that are discrete white noise. Let’s further extend(...) Time Series Analysis for Financial Data IV— ARMA Models [Auquan]In the previous posts in this series, we talked about Auto-Regressive Models and Moving Average Models and found that both these models only partially explained the log-returns of stock prices. We now combine the Autoregressive models and Moving Average models to produce more sophisticated(...) Calibrating Jump Diffusion Models using Differential Evolution [Top of The Bell Curve]Determining the correct parameter values to be used in a Jump-Diffusion model is not a trivial process (as outlined here). In this blog post we will be using the biologically inspired differential evolution technique to calibrate a Jump-Diffusion model using simulated share price data. The Jump(...) External Strategy Rule Evaluation. Too many rules? [Alvarez Quant Trading]A common question I get is where do I find all my research ideas. My main source is Quantocracy. He does a great job of curating posts because the work is manually done. Then there the Better System Trader and Trend Following Radio podcasts. Usually from these sources I get a nugget of an idea to(...) Can Time Solve the Issue of High Valuations? [EconomPic]What an investors pays for an asset directly impacts the forward return an investor is likely to receive. The question for any investor given today’s high stock multiples AND low bond yields globally is how much this matters not only over an intermediate time frame, but over a period potentially(...) 5 Questions For Wesley Gray of @AlphaArchitect [Capital Spectator]Momentum investing – betting on the persistence of price trends in the short to medium term — has captured the crowd’s attention in recent years. Consider, for instance, the strong growth in ETF assets in the niche. The first fund launched a bit more than five years ago; today, there are(...) Iron Condor Results Summary - Part 5 - IC Structure vs Metrics Correlation [DTR Trading]In the last article, posted way back in August, I looked at the Iron Condor structures that appeared to perform the best for each of the seven metrics I tracked. Recall that I tested 3024 different Iron Condor strategy variations over the period from January 2007 through September 2016. This testing(...) Portable Beta: Making the Most of the Returns You're Already Getting [Flirting with Models]Traditionally, investors have used a balance between stocks and bonds to govern their asset allocation. Expanding this palette to include other asset classes can allow them to potentially both enhance return and reduce risk, benefiting from diversification. Modern portfolio theory tells us, however,(...) Skis and Bikes: The Untold Story of Diversification with Risk Parity [Invest Resolve]In most parts of Canada we have very distinct seasons. Some months of the year are temperate and relatively dry, while other months are cold and snowy. As a result, most Canadian towns of any size have stores that sell skis and bikes. Of course, they don’t inventory both skis and bikes at the same(...) Why The SPX Reversal May Be A Positive For The Bulls [Quantifiable Edges]Before spending much Monday selling off, the SPX managed to make a new intraday all-time high. The new high followed by a poor and downward close triggered the study below, from the Quantifinder. Results are all updated. 2017-12-05 Results here seem to suggest an upside edge over the next 1-2 weeks.(...) Diverisification is Not Always a Free Lunch [Alpha Architect]Shawn McKay, Robert Shapiro, Ric Thomas A version of this paper can be found here Want to read our summaries of academic finance papers? Check out our Academic Research Insight category. What are the research questions? Diversification is often thought of as the only “free lunch” in finance and(...) Equity Market is Efficient - But on a Long Term [Quantpedia]We provide further evidence that markets trend on the medium term (months) and mean-revert on the long term (several years). Our results bolster Black’s intuition that prices tend to be off roughly by a factor of 2, and take years to equilibrate. The story behind these results fits well with the(...) Tactical Asset Allocation in November [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(...) Intersectional Model: Sorting by 7 Factors [Factor Research]Focusing purely on Value is a difficult strategy Sorting by multiple factors improves performance and risk-metrics However, factor selection and allocation remain challenging topics INTRODUCTION Value is likely the most common strategy for equity fund managers as the principle of buying something at(...) Alternative Data Conference [Quandl]ADC 18 is an event for institutional investors and business professionals working to stay on top of the radically evolving landscape of alternative data. Signal Graphic Alternative Data Vizualization The alternative data landscape is evolving quickly. In less than one year, we've seen rapid(...) Statistical Distributions of the Volatility Index [Relative Value Arbitrage]VIX related products (ETNs, futures and options) are becoming popular financial instruments, for both hedging and speculation, these days. The volatility index VIX was developed in the early 90’s. In its early days, it led the derivative markets. Today the dynamics has changed. Now there is strong(...) Installing TensorFlow on Ubuntu 16.04 with an Nvidia GPU [Quant Start]Any serious quant trading research with machine learning models necessitates the use of a framework that abstracts away the model implementation from the model specification. This is particularly crucial for deep learning techniques as production-grade models require training on GPUs to make them(...) Everyone, Even a Passive Vanguard Investor, is a Factor Investor [Alpha Architect]Much has been made of Factor Investing, and even Vanguard is launching a suite of actively-managed factor ETFs. But even now, with Vanguard offering factor ETFs, there are many investors that only invest passively into an index fund, such as the SP500 or EAFE index. These investors will cite the(...) Adaptive Volatility: A Robustness Test Using Global Risk Parity [CSS Analytics]In the last post we introduced the concept of using adaptive volatility in order to have a flexible lookback as a function of market conditions. We used the R-squared of price as a proxy for the strength of the trend in the underlying market in order to vary the half-life in an exponential moving(...) A Better Way to Model the VIX [Six Figure Investing]Models are useful. They help us understand the world around us and aid us in predicting what will happen next. But it’s important to remember that models don’t necessarily reflect the underlying reality of the thing we’re modeling. The Ptolemaic model of the solar system assumed the Earth was(...) Combine Market Trend and Economic Trend Signals? [CXO Advisory]A subscriber requested review of an analysis concluding that combining economic trend and market trend signals enhances market timing performance. Specifically, per the example in the referenced analysis, we look at combining: The 10-month simple moving average (SMA10) for the broad U.S. stock(...) Myth Busting: Stocks Correlations and Active Investment Opportunities [Alpha Architect]Many investors, investment professionals, and pundits make comments regarding the relationship between stock correlations and opportunities for active stock pickers. For example, here is a recent example from the Financial Times: Correlation crash clears way for stockpickers. The basic (albeit(...) Factor Investing and Trading Costs [Alpha Architect]Factor investing, and the associated intellectual battles, have raged for decades in academic finance journals. However, now that factor investing has gone mainstream via ETFs, the debate has broader interest among the investing public. Some investors question the very existence of factor premiums.(...) SPY’s 2-Day Pattern Suggesting A Bullish Tendency For Tuesday [Quantifiable Edges]SPY gapped up and closed lower Monday after leaving an unfilled up gap on Friday. This triggered the study below that examined similar price action in SPY with regards to how it gapped and finished More About Meta: The Best Asset Allocation Strategies Over Time [Allocate Smartly]Last month we launched Meta Strategy, our own smart approach to combining the 40+ tactical asset allocation strategies tracked on our site. Each month, Meta selects 10 strategies and then trades their combined asset allocation. Members can follow Meta in near-real time. Each month’s 10 strategies(...) Algorithmic Options Trading, Part 3 [Financial Hacker]In this article we’ll look into a real options trading strategy, like the strategies that we code for clients. This one however is based on a system from a trading book. As mentioned before, options trading books often contain systems that really work – which can not be said about stock or forex(...) Computing Option Skews with Dask [Black Arbs]This article series provides an opportunity to move towards more interactive analysis. My plan is to integrate more Jupyter notebooks and Github repos into my research/publishing workflow. For datasets that are too big to share through github I will provide a download link both here and in the(...) Factor Construction: Portfolio Scenarios [Factor Research]Most researchers create factor portfolios by taking the top & bottom 30% of stocks, which results in large portfolios Portfolios can be reduced, but firm risks start influencing factor returns with too few stocks Most investors are likely better of buying factor products then building factor(...) Are Market Implied Probabilities Useful? [Flirting with Models]Using historical data from the options market along with realized subsequent returns, we can translate risk-neutral probabilities into real-world probabilities. Market implied probabilities are risk-neutral probabilities derived from the derivatives market. They incorporate both the probability of(...) Do Short Selling Costs Affect the Profitability of Stock Anomalies [Quantpedia]Short selling frictions cannot explain the persistence of seven prominent stock anomalies. Long-only investing is robust and profitable and can be further enhanced by using a synthetic short. Moreover, portfolios restricted to stocks that are easy to short sell continue to have large and significant(...) Factor Investing: Implementation Costs Really Do Matter [Dual Momentum]One of the tenets of modern portfolio theory is that you cannot generally beat the market after transaction costs. Yet academic researchers have shown that momentum consistently beats the market. Other factors besides momentum have also cast doubt on the efficacy of the efficient market hypothesis.(...) QSTrader: November 2017 Update [Quant Start]Last month I presented a detailed roadmap for the redevelopment of QSTrader, our open-source systematic trading simulation engine. Today I want to discuss our progress in the month since that article was published and what still remains to be completed prior to the initial 0.1.0 alpha release.(...) From Potential to Proven: Why AI is Taking Off in the Finance World [Robot Wealth]This article is a departure from the quantitative research that usually appears on the Robot Wealth blog. Until recently, I was working as a machine learning consultant to financial services organizations and trading firms in Australia and the Asia Pacific region. A few months ago, I left that world(...) How To Get Free Intraday Options Data With Pandas-DataReader [Black Arbs]This is a simple reference article for readers that might wonder where I get/got my options data from. In this regard I would like to shout out the contributors to the pandas-datareader, without their efforts this process would be much more complex. Intuitive Explanation So this code consists of(...)