Quant Mashup Your best strategy in 2016… up till Q3 [Quant Investing]I wanted to send you this article shortly after the end of the third quarter 2016 but, like a lot of things, it slipped my mind. What has worked in 2016 – value is not dead I will get right to the point about what strategy would have given you the best return so far in 2016. Here is a short(...) Python Data Visualization using Bokeh for Algo Traders and Quants [Quant Insti]A picture is worth a thousand words or said a wise woman a hundred years ago. True to every word of the idiom, the beauty of visualization lies in how clearly it might convey multiple messages. Visualization of data is one of the key functions of a data scientist and decoding the visual messages is(...) Research Review | 4 Nov 2016 | Risk Factors & Return Premia [Capital Spectator]Measuring Factor Exposures: Uses and Abuses Ronen Israel and Adrienne Ross (AQR Capital Management) September 19, 2016 A growing number of investors have come to view their portfolios (especially equity portfolios) as a collection of exposures to risk factors. The most prevalent and widely harvested(...) October brings another down month to Trend Following [Wisdom Trading]Election year is shaping up to be a bad year for trend following. October saw the State of Trend Following index post another successive down month. The current drawdown is still within the limits of the max value from the historical back-test run, but the Year-To-Date performance is now well into(...) Principal Component Analysis [Quant Dare]Principal Component Analysis (PCA) is a technique used to reduce the dimensionality of a data set, finding the causes of variability and sorting them by importance. >How? If you have a set of observations (features, measurements, etc.) that can be projected on a plane (X, Y) such as: DataSet(...) Bottom-Up Works Best With Multiple Factors [Larry Swedroe]CAPM was the first formal asset pricing model. Market beta was its sole factor. With the 1992 publication of their paper, “The Cross-Section of Expected Stock Returns,” Eugene Fama and Kenneth French introduced a new-and-improved three-factor model, adding size and value to market beta as(...) Antonacci's Composite Dual Momentum [Allocate Smartly]This is a test of Gary Antonacci’s “Composite Dual Momentum” strategy from his seminal paper: Risk Premia Harvesting Through Dual Momentum. The model uses Antonacci’s unique approach to measuring momentum, which considers both absolute (aka time-series) and relative (aka cross-sectional)(...) The Risk of Low Volatility Strategies [Investing Research]Most factor-based, otherwise known as Smart Beta, ETF strategies are based on a single concept like value or momentum. Over the last two years, the largest flows have been to ETFs investing in low volatility stocks. The most popular being the iShares Edge MSCI Min Vol USA ETF (USMV), which as of(...) Financial Time-Series Segmentation Based On Turning Points in Python [Quant at Risk]A determination of peaks and troughs for any financial time-series seems to be always in high demand, especially in algorithmic trading. A number of numerical methods can be found in the literature. The main problem exists when a smart differentiation between a local trend and “global” sentiment(...) A Reversal-Based Trading Strategy Around Earnings Announcements [Quantpedia]This study documents that earnings announcements serve as a reality check on short-term, fear and greed driven price development: stocks with extreme abnormal returns in the week before an earnings announcement experience strong price reversal around the announcement. A trading strategy that(...) Value Investing using Enterprise Multiples - Is the Premium Due to Risk and/or Mispricing? [Alpha Architect]At Alpha Architect, we are big fans of Value investing (and Momentum). In the past, Wes and I examined which valuation measure had the largest spread between Value and Growth firms. The evidence showed (updated results here) that Enterprise Multiples had the largest spread between Value and Growth(...) Risk Parity and The Four Faces of Risk [GestaltU]Benjamin Graham famously said that "In the short run, the market is a voting machine but in the long run, it is a weighing machine." But this is not quite correct. Rather, in the short term, the market is a machine where investors "vote" about what the market will(...) Low Priced Stocks No Bargain [Larry Swedroe]As I wrote about last week, the absolute level of a firm’s stock price is arbitrary, as it can be easily manipulated by the firm through altering the number of shares outstanding (for example, by splitting the stock). Despite this obvious fact, the research into investor behavior has found a(...) Tactical Asset Allocation in October [Allocate Smartly]This is a summary of the recent performance of a number 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 the(...) Rising Correlations and Tactical Asset Allocation [Flirting with Models]The power of strategic asset allocation is best harnessed when future asset class behavior is relatively certain and diversification opportunities abound. Uncertainty around rising rates and the current monetary policy environment may call both of these criteria into question. Holding all else(...) The Rebalance Bonus for Value and Momentum Porfolios [Alpha Architect]A sophisticated DFA-focused advisor asked us to conduct some research on the following question: Are there additional portfolio diversification benefits to combining concentrated portfolios of value and momentum stocks relative to combining less concentrated portfolios of value and momentum stocks?(...) Demystifying the Hurst Exponent – Part 1 [Robot Wealth]This is the first post in a two-part series about the Hurst Exponent. Tom and I worked on this series together, but the awesome code presented throughout is all his. Thanks Tom! Mean-reverting time series have long been a fruitful playground for quantitative traders. In fact, some of the biggest(...) Foundations of Successful Trading with Howard Bandy [Better System Trader]There are a number of different aspects to trading that we really need to get a handle on to increase our odds of success. Some aspects we often put a lot of thought and analysis into, and others we may not consider so carefully or at all, which could be impacting our trading results without us even(...) Mathematics and economics: A reality check [Mathematical Investor]One of us (Marcos Lopez de Prado) has published the article Mathematics and economics: A reality check in the Journal of Portfolio Management. The article is open-access — there is no fee for viewing or downloading. Lopez de Prado argues that while economics is arguably one the most mathematical(...) Currency Strength Indicator [Dekalog Blog]Over the last few weeks I have been looking into creating a currency strength indicator as input to a Nonlinear autoregressive exogenous model. This has involved a fair bit of online research and I have to say that compared to other technical analysis indicators there seems to be a paucity of pages(...) A Framework for a Short VIX Allocation [EconomPic]It has historically paid to be a seller of volatility for at least two reasons... 1) Volatility is typically overpriced relative to realized volatility The chart on the left shows the VIX index (predicted volatility) relative to the forward realized volatility of the S&P 500, while the chart on(...) VXX & XIV Strategies [Alvarez Quant Trading]My recent research has been on the volatility Exchange Traded Products. My focus has been on long trades using VXX and XIV. Although VXX has a very strong downtrend, I am not a fan of developing short strategies on it due to the huge upside risk. I wrote about XIV here and expressed some of the(...) Interactive Brokers API in Docker [Ryan Kennedy]While Interactive Brokers provide arguably the most extensive retail-level API available for trading, the software is quite frustrating to work with. Rather than IB offering you an API endpoint on their server to interact with, you must run their Gateway or TWS program on your host and interact with(...) How to Turn an Engineer into a Quantitative Investor [Alpha Architect]We receive multiple requests from readers looking to break into the finance industry. Quite often the reader is currently working in a traditional engineering job and looking to make a career switch. The question we often hear is “How does an engineer become a quantitative finance geek?” To(...) Spot Price Patterns with the COT Report [Milton FMR]This post goes into an in depth analysis of the commitment of traders report and its usefulness for predicting price movements. The CFTC collects data on the daily positions of large participants in the commodity markets. The data is aggregated in the weekly COT report which is published every(...) Strategic and Equal Weighted ETF Portfolios in QSTrader [Quant Start]In a previous article the monthly rebalance feature of the open-source backtesting library QSTrader was demonstrated on a simplistic equities/bonds ETF mix portfolio. In this article new streamlined code will be presented to allow straightforward modification of the portfolio weightings. In(...) Is My Diversified Commodity Index Just Oil? [Flirting with Models]The benefit of including commodities in individual investor portfolios is often up for debate, focusing on aspects such as expected returns, volatility, access, and diversification. While we think that commodities can add value if the risks are understood, many passive ETFs that offer commodity(...) Connecting FXCM over FIX (QuickFix engine) [Quant Insti]We talked about the defacto standard for message communication in our previous article on FIX protocol. “The Financial Information Exchange (FIX) Protocol is a message standard developed to facilitate the electronic exchange of information related to securities transactions. It is intended for use(...) Published Results Impact Future Results [Larry Swedroe]Financial research has uncovered many relationships between investment factors and stock returns. For investors, an important question is whether the publication of this research can impact the future size of factor premiums. Asking this question is crucial on two fronts. First, if anomalies are the(...) Evolving Neural Networks through Augmenting Topologies – Part 4 of 4 [Gekko Quant]This post explores applying NEAT to trading the S&P. The learned strategy significantly out performs buying and holding both in and out of sample. Features: A key part of any machine learning problem is defining the features and ensuring that they’re normalised in some fashion. The features(...) Flexing VBA For Quants (And Everyone Else) [TrendXplorer]Would it not be great to have the models for Protective Asset Allocation (PAA) and Global Protective Momentum (GPM) in Excel, so you can run your own backtests without AmiBroker? And not being limited to a pre-defined universe? Actually, now you can. Based on a foundation by InvestExel, Denis(...) Tail Protection of Trend-Following Strategies [Quantpedia]The performance of trend following strategies can be ascribed to the difference between long-term and short-term realized variance. We revisit this general result and show that it holds for various definitions of trend strategies. This explains the positive convexity of the aggregate performance of(...) Algorithmic Trading Basics for New Algorithmic Traders [Quant Insti]With more than 70% of the trading volumes in the US markets being automated, the rise of the algorithms seem more inevitable than ever before. The mechanical jobs are shifting to computers and only those who can tame the machines can rule the trade markets. Equipping oneself with the skills of(...) Reflexivity and the Feedback Effect in Financial Markets [Alpha Architect]Eugene Fama’s Efficient Market Hypothesis argues that because stock prices follow a “random walk,” future price behavior cannot be predicted. In his seminal paper, “Random Walks in Stock Market Prices,” he explains the relationship between prices and fundamentals: If the random-walk theory(...) Zero Lag Moving Average Filter | Trading Strategy (Entry & Exit) [Oxford Capital]I. Trading Strategy Developer: John Ehlers and Ric Way. Source: Ehlers, J., Way, R. (2010). Zero Lag (Well, Almost). Concept: Trend following trading strategy based on moving average filters. Research Goal: To verify performance of the Zero Lag Moving Average Filter. Specification: Table 1. Results:(...) Stoken's Active Combined Asset Strategy [Allocate Smartly]This is a test of Dick Stoken’s Active Combined Asset (ACA) strategy from his book Survival of the Fittest for Investors. This tactical asset allocation strategy uses price channel breakouts to choose between pairs of opposing risk and defensive asset classes. Results from 1988, net of transaction(...) Is Equal Weighting Beneficial For Asset Allocation? Part IV [Capital Spectator]Equal weighting asset allocation doesn’t look encouraging as a portfolio-design tool, based on last week’s preliminary analysis. Can we salvage equal weighting by expanding the opportunity set with a more granular mix of funds? In a word, no. As we’ll see, equal weighting across asset classes(...) Capital Efficiency in Multi-factor Portfolios [Flirting with Models]The debate for the best way to build a multi-factor portfolio – mixed or integrated – rages on. Last week we explored whether the argument held that integrated portfolios are more capital efficient than mixed portfolios in realized return data for several multi-factor ETFs. This week we explore(...) Book Review of Quantitative Momentum [Dual Momentum]I have been looking forward to Wes Gray and Jack Vogel's new book, Quantitative Momentum. It is the only book besides my own Dual Momentum that relies on academic research to develop systematic momentum strategies. My book uses a macro approach of applying momentum to indices and asset classes.(...) October Opex Week Has Historically Been Bullish [Quantifiable Edges]From a seasonal standpoint option expiration week is often a pretty good week for the market. October is one of those months where it has been especially good over the years. The study below examines performance during October op-ex week. 2016-10-17 image1 I decided to exclude 2008 because action(...) Monthly Rebalancing of ETFs with Fixed Initial Weights in QSTrader [Quant Start]Many institutional global asset managers are constrained by the need to invest in long-only strategies with zero or minimal leverage. This means that their strategies are often highly correlated to "the market" (usually the S&P500 index). While it is difficult to minimise this(...) Algorithmic Trading in Indian Markets using Python [Quant Insti]Algorithmic Trading in Indian Markets using Python We have told you why Python is one of the preferred languages to do algo trading in this article. We have also told you how algorithmic trading in India. Since we are gearing up for our webinar on Trading in Indian Markets using Python (Not(...) Podcast: Strategy Optimization with Robert Pardo [Better System Trader]Why is it that some traders can create trading strategies that perform well in real-time trading while other strategies fall apart? How do some traders keep their trading strategies fresh and adaptive to market conditions while other strategies just stop working altogether? Robert Pardo, president(...) How to Measure Momentum? [Alpha Architect]Since we’ve released our new book, Quantitative Momentum, we’ve received a handful of basic questions related to momentum–specifically as it relates to stock selection. At this point, the so-called “momentum effect” has occupied academic researchers for several decades. Researchers have(...) Client -III- [Algorythmn Trader]In my previous post, I started the implementation of WPF program entry point and the View ViewModel interaction basics. The goal of this “Client chapter” is to get a client application which connects to the basic server application I covered earlier. This post continues the basic infrastructure(...) So You Want to Build Your Own Algo Trading System? [Robot Wealth]Unlike any other business, algorithmic trading has the advantage of being independent of marketing, sales, customers and all those things that need the ‘pretty people’ to make it run. Also, you get almost instant feedback on how good you are in your business. For anyone who is numerically(...) Zero-Crossing Variant of Pairs Trading Strategy [Quantpedia]Pairs trading is a venerable trading strategy. There is agreement that it worked fine in the far past. But it is less clear if it still profitable today. In this working paper the universe of eligible pairs is defined by the holdings of a given ETF. It is shown that the stocks must be from ETFs(...) The illusion of choice in ETF's [Factor Investor]A search for all equity ETF's available to U.S. investors in Bloomberg leads to a list of 969 candidates, a surprisingly large number of options for a relatively new investment vehicle. Given that most focus on large capitalization stocks here in the U.S. (not all, but most), this means that(...) A Review of @AlphaArchitect Quantitative Momentum book [QuantStrat TradeR]This post will be an in-depth review of Alpha Architect’s Quantitative Momentum book. Overall, in my opinion, the book is terrific for those that are practitioners in fund management in the individual equity space, and still contains ideas worth thinking about outside of that space. However, the(...) Reverse Engineering AQR's Risk Parity Strategy [Signal Plot]I’m going to start this post by saying that it makes no sense for anyone to pay management fees to get a return stream that is highly correlated to any existing asset class. Unfortunately, many actively managed funds fall in this category. There’s two reasons for this. One, you can replicate(...)