Quant Mashup Free Friday #19 – Long/Short Small Caps and June Update [Build Alpha]This Free Friday, Free Friday #19, is a user submission! It is a long/short strategy for $IWM - the Russell 2000 ETF. Both the long and the short strategy only have two rules each and only hold for 1 day. Below I’ve posted the long strategy on the left and the short strategy on the right. Short(...) Research Review | 30 June 2017 | Searching For Alpha [Capital Spectator]US Sector Rotation with Five-Factor Fama-French Alphas G. Sarwar (University of Greenwich), et al. June 16, 2017 In this paper we investigate the risk-adjusted performance of US sector portfolios and sector rotation strategy using the alphas from the Fama-French five factor model. We find that(...) Tactical Asset Allocation: Does the Day of the Month Matter? [Alpha Architect]Most long-term approaches to investing, like tactical asset allocation or factor investing, are designed to trade infrequently, generally once a month or once a quarter. This is a feature, not a limitation. Trading infrequently forces a strategy to ignore day-to-day noise and focus on long-term(...) Dynamic Asset Allocation for Practitioners, Part 3: Risk-Adjusted Momentum [Invest Resolve]So far, we’ve discussed the importance of investment universe selection and price momentum in designing a robust asset allocation methodology. If you haven’t read those articles, we would strongly encourage you to do so before proceeding with this one. We lay most of the explanatory and(...) Dispersion Trading Using Options [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. Introduction The Dispersion Trading is a strategy used to(...) A Tell-Tale Sign of Short-Run Trading [Alex Chinco]Motivation Trading has gotten a lot faster over the last two decades. The term “short-run trader” used to refer to people who traded multiple times a day. Now, it refers to algorithms that trade multiple times a second. Some people are worried about this new breed of short-run trader making(...) Trading Decisions of Your Stone Age Grandpa can Make You Money in Forex [Quant Journey]Why Ferrari or Rolex does not price their products at 149.999 or 12.999 but most of the items you see in your supermarket is priced like 4.99? Because Ferrari never likes to position itself as a bargain. Did you know that we tend to chose the price with less syllables even if the two prices have the(...) Visualizing Time Series Data in R [R Trader]I’m very pleased to announce my DataCamp course on Visualizing Time Series Data in R. This course is also part of the Time Series with R skills track. Feel free to have a look, the first chapter is free! Course Description As the saying goes, “A chart is worth a thousand words”. This is why(...) Should You Buy or Rent a GPU-Based Deep Learning Machine for Quant Trading Research? [Quant Start]We've recently been considering the field of deep learning as a modelling methodology for forming new quantitative trading models. Such models have been shown to be 'unreasonably effective' in the fields of computer vision, natural language processing and games of strategy. This(...) Duration Timing with Style Premia [Flirting with Models]In a rising rate environment, conventional wisdom says to shorten duration in bond portfolios. Even as rates rise in general, the influence of central banks and expectations for inflation can create short term movements in the yield curve that can be exploited using systematic style premia. Value,(...) Academic Research Insight: The Value of Crowsourced Earnings Forecasts [Alpha Architect]What are the research questions? Are crowdsourced earnings forecasts from a source such as Estimize, useful in the capital markets by capturing new information about future earnings? Does a site such as Estimize add incremental accuracy when combined with the conventional, sell-side earnings(...) Struggling Quant Episode 1: How I lost USD 500,000 [Quant Journey]STRUGGLING QUANT episode 1: How I lost USD 500.000 while figuring out the link between questions, math, stats, coding and trading Say that you are 30 years old and you have a good 25 years to work hard. Instead of going down the easy way of working for someone else during the day and killing time in(...) Density Estimation Using Regression [Eran Raviv]Density estimation using regression? Yes we can! I like regression. It is one of those simple yet powerful statistical methods. You always know exactly what you are doing. This post is about density estimation, and how to get an estimate of the density using (Poisson) regression. The “go-to”(...) The birth of a strategy – a common effort [Quant Bear]Let’s start an experiment! This post will be the first in a series on going through the process of creating a trading strategy. It will not only detail the steps that I myself curently follow when I am building a strategy, what I’m hoping for is that others contribute to the process by adding(...) Some more trading rules [Investment Idiocy]It is a common misconception that the most important thing to have when you're trading, or investing, systematically is good trading rules. In fact it is much, much, much more important to have a good position management framework (as discussed in my first book) and to trade a diversified set(...) Rough Path Theory and Signatures Applied To Quantitative Finance - Part 4 [Quant Start]This is the fourth in a new advanced series of posts written by Imanol Pérez, a PhD researcher in Mathematics at Oxford University and an expert guest contributor to QuantStart. In this post Imanol applies the Theory of Rough Paths to the task of predicting which country a company belongs to based(...) Factor Investing: Evidence Based Insights [Alpha Architect]I will be talking on the Factor Investing panel at the upcoming Evidence-Based Investing Conference in Dana Point, CA next Sunday –Tuesday. I am excited for the opportunity to chat, and figured I would highlight a few thoughts we have on the topic going into the event. First, what is “evidence(...) Matrix Algebra - Linear Algebra for Deep Learning (Part 2) [Quant Start]Last week I posted an article, which formed the first part in a series on Linear Algebra For Deep Learning. The response to the article was extremely positive, both in terms of feedback, article views and also more broadly on social media. Many of you commented that there was "an appetite"(...) Iron Condor Results Summary - Part 2 - Loss Levels [DTR Trading]In the last article we looked at the backtest results from 600,912 iron condor trades entered between January 2007 and September 2016. The focus in that article was on win rate and normalized P&L per day for each of the 3024 variations tested. Recall that we looked at combinations of: Trade(...) Taming Mean Reversion’s Left Tail – Don’t use Stop Losses! [Sutherland Research]Mean reversion strategies rely on the premise that extremes in price eventually revert to the mean price over time. They are effective during established markets – bull, bear or sideways – but unfortunately do not perform well during market regime changes or tail events. Tail events are outcomes(...) In-Sample and Out-Of-Sample Testing [Alvarez Quant Trading]I am frequently asked if I do out-of-sample testing. The short answer is not always and when I do, it is not how most people do the test. There are lots of considerations and pitfalls to avoid when doing out-of-sample testing. Out-of-sample testing is not the panacea it is made out to be. There are(...) Importing and Managing Financial Data [Foss Trading]I'm excited to announce my DataCamp course on importing and managing financial data in R! I'm also honored that it is included in DataCamp's Quantitative Analyst with R Career Track! You can explore the first chapter for free, so be sure to check it out! Course Description Financial(...) Survey of Quality Investing [Quantpedia]Factor investing has experienced a resurgence in popularity under the moniker “smart beta.” Several traditional factors, such as value, size, momentum, and low beta, are well defined and have been heavily researched in academia as return anomalies for many decades. These factors have also been(...) An Out of Sample Update on DDN’s Volatility Momentum Trading Strategy and Beta Convexity [QuantStrat TradeR]The first part of this post is a quick update on Tony Cooper’s of Double Digit Numerics’s volatility ETN momentum strategy from the volatility made simple blog (which has stopped updating as of a year and a half ago). The second part will cover Dr. Jonathan Kinlay’s Beta Convexity concept. So,(...) Dynamic Asset Allocation for Practitioners, Part 2: The Many Faces of Price Momentum [Invest Resolve]In our last post, we covered the importance of a well-designed investment universe as a precondition for thoughtful diversification. In this second article on Dynamic Asset Allocation for Practitioners we will explore several methods for measuring price momentum to compare and contrast their utility(...) You Don't Want to Buy Vol, You Want to Sell Vol! [Meb Faber]That headline was a response I received from a handful of friends regarding my last post on buying puts as tail risk insurance. And I agree. Well, sort of. It’s been long known that there exists a premium for selling insurance…hey, otherwise why would anyone do it? Now what if you could combine(...) Isolating the Monkey Effect [Markov Processes]Continuing our exploration into the smart beta segment (Part 1, Part 2), in this third post we introduce a simple “IQ Test” that can help investors and managers measure the “smartness” of the increasing number of non-cap-weight rules-based products on the market. There are numerous arguments(...) Academic Research Insight: The Strategic Timing of Earnings News [Alpha Architect]Title: FURTHER EVIDENCE ON THE STRATEGIC TIMING OF EARNINGS NEWS: JOINT ANALYSIS OF WEEKDAYS AND TIMES OF DAY Authors: RONI MICHAEY, AMIR RUBIN, ALEXANDER VEDRASHKO Publication: JOURNAL OF ACCOUNTING AND ECONOMICS, 2016 (version here) What are the research questions? Do managers act to strategically(...) Is Your Multi-Asset Strategy Really Multi-Asset? [Flirting with Models]The term “multi-asset” appears in many investment strategies and applies to both balanced funds and target date retirement funds. However, multi-asset strategies may be concentrated in a limited set of asset classes, and the performance of these asset classes may be driven by an even more(...) Machine Learning In Python for Trading [Quant Insti]At the end of my last blog, I had asked a few questions. Now, I will answer them all at the same time. I will also discuss a way to detect the regime/trend in the market without training the algorithm for trends. But before we go ahead, please use a fix to fetch the data from Google to run the code(...) Algorithmic Options Trading, Part 2 [Financial Hacker]In this second part of the Algorithmic Options trading series we’ll look more closely into option returns. Especially into the methods of combining different option types for getting user-tailored profit and risk curves, which gives options an interesting advantage over other financial(...) Nervous About The Market? It Might Be Time for This Strategy [Meb Faber]When the tech bubble collapsed back in 2000, the Nasdaq fell from 5,132 to just 1,470 a few months later. Many popular stocks found their market prices gutted. For example, Cisco lost 86% of its market cap, while Amazon fell over 90% from $107 to $7. Losses such as these decimated investor(...) Research Review | 16 June 2017 | Yield Curve Analysis [Capital Spectator]Monetary Policy Uncertainty and Bond Risk Premium Fuwei Jiang (Central University of Finance and Economics) and Guoshi Tong (Renmin University) October 1, 2016 We show that uncertainty of monetary policy (MPU) commands a risk premium in the US Treasury bond market. Using the news based MPU measure(...) Active Share: Does it Predict Fund Performance? [Alpha Architect]The Holy Grail for mutual fund investors is the ability to identify in advance, which of the active mutual funds (or ETFs nowadays) will outperform in the future. The evidence suggests this task is almost impossible. To date, the overwhelming body of academic research has demonstrated that past(...) Scalars, Vectors, Matrices and Tensors - Linear Algebra for Deep Learning (Part 1) [Quant Start]Back in March we ran a content survey and found that many of you were interested in a refresher course for the key mathematical topics needed to understand deep learning and quant finance in general. Since deep learning is going to be a big part of this year's content we thought it would be(...) Fractal Adaptive Moving Average | Trading Strategy (Setup) [Oxford Capital]I. Trading Strategy Developer: John Ehlers. Source: Ehlers, J., FRAMA: Fractal Adaptive Moving Average. Concept: Trend following trading strategy based on adaptive price filters. Research Goal: To verify performance of the Fractal Adaptive Moving Average (FRAMA). Specification: Table 1. Results:(...) "Passive" Investing: Theory and Practice in a Global Market [Alpha Architect]Purely passive investing is theoretically plausible, but practically impossible. That said, the practical implementations can often be “good enough.” As a theoretical index investor, you deploy capital, take a long snooze, and wake up some day to consume your portfolio. Unfortunately, the world(...) Portfolio Weighting Schemes for Commodity Futures Risk Premia [Quantpedia]We examine whether and to what extent successful equities investment strategies are transferrable to the commodities futures market. We investigate a total of 7 investment strategies that involve optimization and mean-variance timing techniques. To account for the unique characteristics of the(...) Factors & Financial Planning [Flirting with Models]In asset management research, we often assume an investor has an infinite horizon, no spending requirements, and no tax consequences. While this may be appropriate for some institutions, it is rarely appropriate for individual investors, leaving financial advisors to fill the gaps. Many factor(...) Academic Research Insight: Factors and the Road to Retirement [Alpha Architect]Title: A WEALTH MANAGEMENT PERSPECTIVE ON FACTOR PREMIA AND THE VALUE OF DOWNSIDE PROTECTION Authors: LOUIS SCOTT AND STEFANO CAVAGLIA Publication: THE JOURNAL OF PORTFOLIO MANAGEMENT, SPRING 2017 (version here) What are the research questions? The article links two current hot topics: goal based(...) Real Time Factor Performance [Dual Momentum]According to S&P DJ Indices, 92% of all actively managed stock funds failed to beat their benchmarks over the past 15 years. This should come as no surprise. Similar results were published more than 20 years ago. This information has caused a move away from active stock selection and toward(...) Is Bitcoin A New Asset Class? [Capital Spectator]The astonishing bull market (bubble?) in Bitcoin has drawn attention to the cryptocurrency from all corners. One of the questions that’s reasonating: Should Bitcoin be treated as an asset class, on par with stocks, bonds, real estate and commodities? A Forbes article last year, citing a study by(...) Yahoo Finance Alternatives [Foss Trading]I assume that you're reading this because you are one of many people who were affected by the changes to Yahoo Finance data in May (2017). Not only did the URL change, but the actual data changed as well! The most noticeable difference is that the adjusted close column is now only(...) Factors vs. Sectors in Asset Allocation [Quantpedia]This paper compares and contrasts factor investing and sector investing, and then seeks a compromise by optimally exploiting the advantages of both styles. Our results show that sector investing is effective for reducing risk through diversification while factor investing is better for capturing(...) Dynamic Asset Allocation for Practitioners, Part 1: Universe Selection [Invest Resolve]In 2012 we published a whitepaper entitled “Adaptive Asset Allocation: A Primer” in which we built upon the simple, robust momentum framework proposed by Mebane Faber in his 2009 study “Relative Strength Strategies for Investing.” Our approach utilized a portfolio optimization overlay to(...) Rough Path Theory and Signatures Applied To Quantitative Finance - Part 3 [Quant Start]This is the third in a new advanced series of posts written by Imanol Pérez, a PhD researcher in Mathematics at Oxford University and an expert guest contributor to QuantStart. In this post Imanol applies the Theory of Rough Paths to the task of handwritten digit classification—a common task for(...) State of Trend Following in May [Au Tra Sy]Negative month for the State of Trend Following report, putting the YTD well in the red. Please check below for more details. Detailed Results The figures for the month are: May return: -3.14% YTD return: -7.44% Below is the chart displaying individual system results throughout May: StateTF May And(...) Classical Asset Allocation: Combining Markowitz and Momentum [Allocate Smartly]This is a test of the “Classical Asset Allocation” strategy from the paper Momentum and Markowitz: A Golden Combination, authored by three of our favorite minds in tactical asset allocation: Dr. Wouter Keller, Adam Butler of GestaltU/ReSolve AM, and Ilya Kipnis from the blog QuantStrat TradeR.(...) Academic Research Insight: Concentration is King [Alpha Architect]Title: PORTFOLIO CONCENTRATION AND PERFORMANCE OF INSTITUTIONAL INVESTORS WORLDWIDE Authors: NICOLE CHOI, MARK FEDEINA, HILLA SKIBA, TATYANA SOKOLYK Publication: JOURNAL OF FINANCIAL ECONOMICS, 2017 (version here) What are the research questions? Portfolios in international markets tend to be more(...) State of Trend Following Down in May and YTD [Wisdom Trading]May 2017 Trend Following: DOWN -2.59% / YTD: -13.91% Despite a pick up in the second half of the month, the index closed last month in the red, continuing the downward trend for the year. Below is the full State of Trend Following report as of last month. Performance is hypothetical. Chart for May:(...)