Quant Mashup Dual Momentum: A Review [Robot Wealth]I recently read Gary Antonacci’s book Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk, and it was clear to me that this was an important book to share with the Robot Wealth community. It is important not only because it describes a simple approach to exploiting(...) Podcast: How to find trading ideas every single day with Rob Hanna (@QuantEdges) [Better System Trader]I recently received an email asking me where all the trading ideas are. I think every episode provides at least 1 idea of value, but one that stands out in my mind was the chat with Rob Hanna in episode 7. In that episode he share loads of trading ideas. But he also goes one step further and(...) Tactical Asset Allocation and the US 60/40 Benchmark [Alpha Architect]Our firm Allocate Smartly provides independent analysis of Tactical Asset Allocation (TAA) strategies. TAA strategies dynamically allocate to broad asset classes like stock indices, bond indices or gold. Unlike a traditional buy & hold portfolio, TAA is able to increase allocation to assets(...) Creating a VIX Futures Term Structure In R From Official CBOE Settlement Data [QuantStrat TradeR]This post will be detailing a process to create a VIX term structure from freely available CBOE VIX settlement data and a calendar of freely obtainable VIX expiry dates. This has applications for volatility trading strategies. So this post, as has been the usual for quite some time, will not be(...) Vix Blues, Large Close to Close Declines in Vix [Voodoo Markets]This monday, we were witnesses to a rather large decline in Vix. Taking a quick look at how often drops like this happen and how has Vix behaved after large single day drops 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 import pandas as pd import numpy as np import matplotlib.pyplot as plt import(...) The Dividend Growth Myth [Meb Faber]A few weeks ago, I was sipping coffee, thumbing through Barron’s as I do every weekend. It’s a way in which I keep a pulse on what’s going on in our space. Though I never consciously pay attention to ads, on that particular morning, one caught my eye – a big full pager from Schwab, below.(...) The best investment strategy in Europe from 2000 to 2014 – data driven [Quant Investing]What investment strategy would have given you the highest returns in Europe over the 13 year period from July 2000 to July 2014? In this article I summarised the master’s thesis of Andreas Hennes (completed at Goethe University Frankfurt am Main on 14 September 2015) where he set out to test(...) Academic Factor Exposure Versus Fund Factor Exposure [Alpha Architect]Tomorrow I’ll be sitting with Pat O’Shaughnessy and Ben Johnson to discuss “Straight Talk About Smart Beta.” Here is a link to the big Morningstar event. In preparation for our discussion we were spitballing ideas and Ben brought up the concept of helping investors understand the(...) Great Academic Finance Research Papers at WFA 2017 [Alpha Architect]There are several big academic finance conferences that attract the best research and the best researchers in one bullpen — the AFA and the WFA meetings. We chatted about the AFA event last January (be sure to check that out). But now it is the WFA’s turn. I attended the WFA a few years back in(...) Why quants don't pick stocks [Flirting with Models]Quant is a broad word with many job descriptions in finance. In asset management, a quant is someone who applies mathematical (usually statistical) techniques to analyzing the securities market, usually with an eye towards identifying investment opportunities. Quants rely on factors: systematic(...) Constrained by capital or why rounding down is bad for you [Quant Bear]Imagine this, you have backtested a strategy adhering to all the “general rules”: you did proper in/out of sample testing, you have stable parameters (if the strategy has any), you didn’t overfit, you account for transaction costs and slippage, everything seems good and you are ready to deploy(...) "Alternative" Facts about Formulaic Value Investing [Alpha Architect]A new paper, “Facts about Formulaic Value Investing,” is making the rounds and professes to plunge a dagger directly into the heart of systematic value investors. Half of my inbox is filled with questions regarding this paper, since we are considered by some — rightly or wrongly — to be(...) Abnormal Returns Memberships (shout out to the inspiration for Quantocracy) [Abnormal Returns]I am excited to announce that Abnormal Returns now supports memberships. The most common compliment I get about Abnormal Returns is that it saves you time. We all well know that time is money. A great way to help keep Abnormal Returns an ongoing, independent entity is to contribute to its upkeep at(...) K-Means in investment solutions: fact or fiction [Quant Dare]We’ve spoken previously about different clustering methods many times: K-Means, Hierarchical Clustering, and so on. However, this field does not end here. In this post, I will try to find how K-Means clustering works in an investment solution. K-Means Clustering The K-Means algorithm partitions(...) Analysis of Commodity Futures Returns Over the Last Decade [Quantpedia]Long-only commodity futures returns have been very disappointing over the last decade, leading some to wonder if it was a mistake to invest in commodities. The poor performance is the result of poor “income returns” and not of falling commodity prices. This observation may be surprising for many(...) Using the BayesOpt Library to Optimise my Planned Neural Net [Dekalog Blog]Following on from my last post, I have recently been using the BayesOpt library to optimise my planned neural net, and this post is a brief outline, with code, of what I have been doing. My intent was to design a Nonlinear autoregressive exogenous model using my currency strength indicator as the(...) Modelling Treasury ETF Performance in an Era of Rising Rates [Allocate Smartly]US Treasuries and other interest rate sensitive instruments form the backbone of many asset allocation strategies. Investors are justifiably concerned about a future of rising interest rates and the potential impact on those instruments. In this post we model that impact on constant maturity(...) Value and Momentum Investing in Frontier Stock Markets [Alpha Architect]Value and Momentum investing have been studied across many different markets and asset classes (Asness et al 2013) and have shown to be effective factors. A working paper, “Frontier Stock Markets: Local vs Global Factors” by Douglas W. Blackburn and Nusret Cakici examines Value and Momentum(...) A Simulation-Based Rebuttal to Research Affiliates (@RA_Insights) [Flirting with Models]Research Affiliates published a new piece of research exploring mutual fund returns over the last 25 years and the implied ability for managers to capture popular factor premiums published by the academic community. They argue that several factors accepted in academia may not be implementable after(...) Swedroe Spotlight: Does Market Sentiment Help Explain Momentum? [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. In 1997, Mark Carhart, in his study “On Persistence in Mutual Fund Performance,” was the first academic to use(...) Parallelized Random Portfolio Generation [Quant Bros]Generate an efficient frontier of random portfolios with custom constraints in R. Accelerate your project with the power of cloud computing using Techila Technologies’ solution in combination with R’s plyr functions. Source code included. The embedded source code below is available due to the(...) Demystifying Bollinger Bands [Milton FMR]How do we know if a price is right and when do we enter the trade ? Is the S&P 500 Index trading at 2355 for that day to high or to low. Should I buy or sell ? Proponents of the Bollinger Band say that this indicator can greatly improve your odds in being on the right side of the market. The(...) Upcoming Webinar: How to use Mixture Models to Predict Market Bottoms w/ @BlackArbsCEO [Quant Insti]The webinar will explain Mixture Models and explore its application to predict an asset’s return distribution and identify outlier returns that are likely to mean revert. The webinar will cover Why bother? Motivating experimentation with Mixture Models How do Mixture Models work? (An intuitive(...) Nuts and Bolts of Quantstrat, Part V [QuantStrat TradeR]This post will be about pre-processing custom indicators in quantstrat–that is, how to add values to your market data that do not arise from the market data itself. The first four parts of my nuts and bolts of quantstrat were well received. They are even available as a datacamp course. For those(...) Buy When There's Blood in the Streets? Market Timing with Volatility Triggers [EconomPic]An 18th century British nobleman, Baron Rothschild, was rumored to have made his fortune buying during the panic that followed the Battle of Waterloo against Napoleon. He is behind the often quoted saying "Buy when there's blood in the streets”, which he continued “even if the blood is(...) Open Up! [Throwing Good Money]This is kind of a weird one. I was mulling over the question of what happens when the market opens up, i.e. above its previous close. Is the day likely to be an up day? A down day? I got out my data and started poking around. I looked at all “open-up” days with an open at least 0.25% above the(...) Introduction to a Basic "Quant" Match Making Service [Alpha Architect]We were recently asked by Aaron Brask, one of our guest bloggers, why we don’t provide a “job board” on our site. Aaron works for several large family offices and he says it is incredibly difficult to find intellectually honest talent. Aaron also pointed out that we have a unique community of(...) Holy Bullish Thursday! [Quantifiable Edges]Below is a quick look at how the SPX has performed in the past on Holy Thursday. Like the last day before many long weekends, it has shown a bullish propensity over the years. 2017-04-13 The numbers are compelling, and it is especially impressive to see how much the winners have outsized the losers How are ETFs Affecting the Stock Market: Is There a Dark Side to ETFs? [Alpha Architect]The Dark Side of ETFs? Sounds interesting, and in my humble opinion, an image of Darth Vader on page 1 would be a great addition to the paper. The paper, “Is there a dark side to exchange traded funds? An information perspective,” written by Doron Israeli, Charles M. C. Lee, and Suhas A.(...) ConnorsRSI Strategy: Optimization Selection [Alvarez Quant Trading]In the previous post, Simple ConnorsRSI Strategy on S&P500 Stocks, I showed a simple strategy which I optimized which gave 1,300 variations. Today, I will cover various methods to choose a strategy to potentially trade. Goals The goals were to find a variation with over 20% CAR and Max Drawdown(...) Back to Basics Part 3: Backtesting in Algorithmic Trading [Robot Wealth]Nearly all research related to algorithmic trading is empirical in nature. That is, it is based on observations and experience. Contrast this with theoretical research which is based on assumptions, logic and a mathematical framework. Often, we start with a theoretical approach (for example, a(...) The Intrinsic Value of Gold [Quantpedia]In this paper, we propose a gold price index that enables market participants to separate the change in the ‘intrinsic’ value of gold from changes in global exchange rates. The index is a geometrically weighted average of the price of gold denominated in different currencies, with weights that(...) The Shape of Supply and Demand Curves in Rapidly Clearing Markets [Mechanical Markets]A central challenge in economics is understanding how price affects the quantity of supply and demand, a relationship often assumed to be approximately linear. But there are markets where this notion of linearity, sometimes called “elasticity,” may not hold. In a paper that deserves more(...) Pop or Drop part 2: Big Moves Upward [Throwing Good Money]In the last post (here), I examined what happened after a stock moved down a significant multiple of its previous day’s Average True Range (ATR20 in this case). Stocks tended to have up days on day 1 and days 3-5, with a down day on day 2 as an average. What about bursts upward? Are they the(...) State of Trend Following in March [Au Tra Sy]Another negative month for this (delayed) State of Trend Following report. To say that the last 12 months have been far from the best performing period for the index seems an understatement. I also include in this month’s report (further below) the 12-month chart from the post I write for the(...) Did Declining Rates Actually Matter? [Flirting with Models]From 1981 to 2017, 10-year U.S. Treasury rates declined from north of 15% to below 2%. Since bond prices appreciate when rates decline, many have pointed towards this secular decline as a tailwind that created an unprecedented bull market in bonds. Exactly how much declining rates contributed,(...) Pop or Drop part 1: Stock Behavior After Big Moves [Throwing Good Money]When stocks are moving gently from one day to the next, there is often no discernible pattern. However when they start rockin' and rollin' one direction or the other, they show certain similarities. I'm always curious how stocks behave when they show a significant drop, or when they(...) Visualizing Data with Python [Build Alpha]In this post I will go over a few different ways to manipulate price data to create visuals to aid in the investing and trading research process. I have attached a ten minute YouTube video that has explanations, etc. However, this post also attempts to briefly walk you through the Python code.(...) Can We Use Mixture Models to Predict Market Bottoms? (Part 2) [Black Arbs]In the previous post I gave a basic "proof" of concept, where we designed a trading strategy using Sklearn's implementation of Gaussian mixture models. The strategy attempts to predict an asset's return distribution such that returns that fall outside the predicted distribution(...) Settle For Oil [Throwing Good Money]Above: long-exposure nighttime shot of oil rigs off the coast of California. Strange things happen to options and futures on fairly predictable dates. Options expiration dates, contract settlement dates…these are trading days where – and this is just my theory – some traders just want to get(...) Market State Impact on Cross-Sectional and Time-Series Momentum Strategy [Quantpedia]Recent evidence on momentum returns shows that the time-series (TS) strategy outperforms the cross-sectional (CS) strategy. We present new evidence that this happens only when the market continues in the same state, UP or DOWN. In fact, we find that the TS strategy underperforms the CS strategy when(...) Philosophical Economics' Growth-Trend Timing [Allocate Smartly]This is a test of the Growth-Trend Timing (GTT) model from the always thought-provoking Philosophical Economics. GTT combines trends in price and key economic indicators to switch between US equities and cash. Results from 1970, net of transaction costs, follow. Read more about our backtests or let(...) March 2017 Trend Following down [Wisdom Trading]March 2017 Trend Following: DOWN -6.56% / YTD: -10.95% More of the same for the State of Trend Following in March. The index continues its downward progress and established a new Max Drawdown figure last month. Below is the full State of Trend Following report as of last month. Performance is(...) What are the Best & Worst Times of Day to Buy the Stock Market? [MKTSTK]I awoke this morning to find the S&P 500 futures down about 11 points. My immediate thought was “oh goodie, there’s some candy for the old early morning BTFD’ers to enjoy” [translation, “I’ll be the market goes up from here”]. This instinct was based on many such mornings of(...) Looking to Improve your Factor Investing? Examine the Trend of Profits [Alpha Architect]A few years ago, the profitability “quality” factor was originally proposed by Robert Novy-Marx. Here is a snippet from the abstract of the paper: Profitability, measured by gross profits-to-assets, has roughly the same power as book-to-market predicting the cross-section of average returns.(...) Prospect Theory, Bias, and Chalk: Our 2017 March Madness Wrap [Invest Resolve]Congrats to the First Place Loser Let’s start off in the obvious place: Mike Philbrick, the poor-man’s Gronkowski, went wire-to-wire in last place. That makes us happy, and so first and foremost, we come to bury him. It’s entirely his fault. We know because the scoring rules were such that,(...) Can We Use Mixture Models to Predict Market Bottoms? [Black Arbs]In Part 1 we learned about Hidden Markov Models and their application using a toy example involving a lazy pet dog. In Part 2 we learned about the expectation-maximization algorithm, K-Means, and how Mixture Models improve on K-Means weaknesses. If you still have some questions or fuzzy(...) Understanding False Discovery Rate [Eran Raviv]False Discovery Rate is an unintuitive name for a very intuitive statistical concept. The math involved is as elegant as possible. Still, it is not an easy concept to actually understand. Hence i thought it would be a good idea to write this short tutorial. We reviewed this important topic in the(...) Do Price Multiples Predict Market Returns? [Larry Swedroe]A large body of work demonstrates that price multiples, such as the dividend-to-price ratio, predict stock returns. As a result, modern asset pricing theory increasingly incorporates time-varying expected returns. The majority of the empirical work underpinning these findings uses U.S. stock market(...) Diversification, Adaptation, and Stock Market Valuation [Philosophical Economics]Looking back at asset class performance over the course of market history, we notice a hierarchy of excess returns. Small caps generated excess returns over broad equities, which generated excess returns over corporate bonds, which generated excess returns over treasury bonds, which generated excess(...)