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Quantocracy’s Daily Wrap for 11/15/2023

This is a summary of links featured on Quantocracy on Wednesday, 11/15/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Military Expenditures and Performance of the Stock Markets [Quantpedia]

    Si vis pacem, para bellum, is an old Roman proverb translated to English as If you want peace, prepare for war, and it is the main idea behind the military policy of a lot of modern national states. In the current globally interconnected world, waging a real hot war has very often really negative trade and business repercussions (as the Russian Federation realized in 2022).
  • Using time series lag() in R finance [Babbage9010]

    Backtesting quant strategies in R requires paying attention to how we lag() our time series. Here be dragons. Lagging a time series relative to another is important in many areas, but we use it a lot in backtesting financial strategies. Ive struggled with the logic of lag() several times, and gotten it wrong more than once. And different packages within the R universe apparently use lag()
  • Sector Rotation Strategy: Should Trading Rules Make Sense? [Alvarez Quant Trading]

    I was doing my usual reading when I came across a sector rotation strategy. I have seen lots of these strategies but this one had a different twist. The strategy was a momentum strategy but instead of buying the top three, it was buying the middle three. The article gave no reason other than it works and gives the best results. In general, people fall into two camps about trading rules. The

Quantocracy’s Daily Wrap for 11/14/2023

This is a summary of links featured on Quantocracy on Tuesday, 11/14/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Small Trader Alpha: An Arbitrage Strategy in SPY Options [Return Sources]

    In this post, I'll discuss in detail an arbitrage trade in SPY options that I'd been running for about a year. (Some of you may have read a short version of this in this twitter post). I'm no longer using it, but it's still a viable strategy to earn some extra money. To be clear, this is a very low capacity trade; I made about 5 thousand dollars with it over a year, and I
  • Inflation surges – how long to return to normal? [Alpha Architect]

    How long will it take for the current level of inflation to subside? If history is any guide, it could take quite a while. Across 198 policy interest rate hikes of at least 1%, a decrease of 1% in inflation took 2 to 4 years (Havranke and Rusnak, 2013). The authors of this research article conduct an empirical analysis of the behavior representative of inflation to provide a realistic context for

Quantocracy’s Daily Wrap for 11/12/2023

This is a summary of links featured on Quantocracy on Sunday, 11/12/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Wiener Khinchin theorem and Gaussian processes [OS Quant]

    The Wiener-Khinchin theorem provides a clever way of building Gaussian processes for regression. Ill show you this theorem in action with some Python code and how to use it to model a process. The Wiener-Khinchin theorem states that an autocovariance function of a weakly stationary process is a function of the power spectral density and vice versa. These two are called Fourier duals and can be

Quantocracy’s Daily Wrap for 11/11/2023

This is a summary of links featured on Quantocracy on Saturday, 11/11/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • An Expenonetially Weighted Covariance Matrix in R [Robot Wealth]

    Exponential weighting schemes can help navigate the trade-off between responsiveness and stability of the inherently noisy estimates we make from market data. We previously saw examples of calculating the exponentially weighted moving average of a vector, and estimating the correlation between SPY and TLT using an exponential weighting scheme [link]. In this article, well implement an
  • Quant_rv performance over three decades [Babbage9010]

    In recent posts we added nATR as a vol measure, went short instead of flat, and significantly improved quant_rvs performance over our in-sample test period 2006-2019. Now we look at the more recent record including the Covid Swoon and Inflation Coaster, and the years prior from the Roaring 90s through the Dot Com Crash. Short take: this was not a strategy anyone would have chosen before the
  • The Performance of Major Private Equity/LBO Firms [Alpha Architect]

    Attracted by the glamour and potential for lottery-like returns, global private equity (PE) assets under management reached $4.2 trillion in 2022. PE involves pooling capital to invest in private companies by providing venture capital (VC) to startups or by taking over and restructuring mature firms via leveraged buyouts (LBOs). PE investors believe that the benefits outweigh the challenges not

Quantocracy’s Daily Wrap for 11/08/2023

This is a summary of links featured on Quantocracy on Wednesday, 11/08/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Calibrating volatility smiles with SABR [PyQuant News]

    In todays newsletter, well explore the SABR stochastic volatility model. Its a very popular volatility model used by professionals for many types of derivatives. Today, well look at how to calibrate the SABR parameters and use them to fit a volatility smile for equity options. Sound good? Lets go! Calibrating volatility smiles with SABR The SABR model, built in 2002, stands as a key

Quantocracy’s Daily Wrap for 11/06/2023

This is a summary of links featured on Quantocracy on Monday, 11/06/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • NEW CONTRIBUTOR: Improving Trend With Mean Reversion [Return Sources]

    In a 2011 paper, To Trade or Not to Trade? Informed Trading with Short-Term Signals for Long-Term Investors, Roni Israelov discusses how investors could use short-term trading signals that are normally too costly to trade, such as short-term reversal. He describes using the short-term signal as a filter to some longer-term signal, and only trading when both signals agree. Heres a very
  • Using Exponentially Weighted Moving Averages to navigate trade-offs in systematic trading [Robot Wealth]

    A big part of the job of the indie trader is data analysis. Were always looking in the past data to validate (or more often, invalidate) a hypothesis about what might predict future returns. And one could argue that recent data is more useful than past data, since it may reflect the current state of affairs more accurately. Or it might not market data are inherently noisy, and so theres
  • Sovereign debt sustainability and CDS returns [SR SV]

    Selling protection through credit default swaps is akin to writing put options on sovereign default. Together with tenuous market liquidity, this explains the negative skew and heavy fat tails of generic CDS (short protection or long credit) returns. Since default risk depends critically on sovereign debt dynamics, point-in-time metrics of general government debt sustainability for given market
  • Organization Capital and the Cross-Section of Expected Returns [Alpha Architect]

    This paper focuses on organization capital, representing intangible assets in a firms key employees that is not captured by classic value measures such as book-to-market. The authors propose a structural model to analyze the impact of organizational capital on asset prices and argue that shareholders perceive firms with high levels of organizational capital to be riskier than those with
  • CLOs – Diversifier, or another Equity Clone? [Finominal]

    Multiple collateralized loan obligation (CLO) ETFs have been launched since 2020 CLOs are promoted as low-risk fixed-income products However, these simply represent diluted equity exposure and offer limited diversification benefits INTRODUCTION The U.S. leveraged loan market has increased from $100 billion in 2000 to $1.4 trillion in 2022, according to data from S&P Global, which is remarkable
  • Technology Spillover Impacts Stock Returns [Alpha Architect]

    The increasing role of intangible assets compared to physical assets in our economy has been accompanied by increased research into their impact on asset prices and returns. Studies such as the 2020 papers Explaining the Recent Failure of Value Investing, Intangible Capital and the Value Factor: Has Your Value Definition Just Expired?, and Equity Investing in the Age of

Quantocracy’s Daily Wrap for 11/03/2023

This is a summary of links featured on Quantocracy on Friday, 11/03/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Inflation and Stock/Treasury Correlation [Allocate Smartly]

    There has been a surge in correlation between US stocks and Treasuries over the last couple of years. To illustrate, below weve shown the rolling 3-year correlation between US stocks and 10-year Treasuries since 1900 (based on monthly returns). Note the spike at the far right of the chart. What is correlation? In this context, it measures the strength of the relationship between US stocks and

Quantocracy’s Daily Wrap for 11/02/2023

This is a summary of links featured on Quantocracy on Thursday, 11/02/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Big boost for quant_rv going long/short SPY/SH (Part 11) [Babbage9010]

    sum: quant_rv was already beating SPY in our last post, with a long-only approach. Testing the remaining (flat) days finds that theyre dominated by losers, so if we go short (using SH ETF) instead of flat, boom! performance jumps again recap quant_rv is a simple quant strategy written in R that goes long SPY when volatility is low, and flat when vol is high. The current quant_rv version

Quantocracy’s Daily Wrap for 11/01/2023

This is a summary of links featured on Quantocracy on Wednesday, 11/01/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Index Tracking: Reproducing the Performance of a Financial Market Index (and more) [Portfolio Optimizer]

    An index tracking portfolio1 is a portfolio designed to track as closely2 as possible a financial market index when its exact replication3 is either impractical or impossible due to various reasons4 (transaction costs, liquidity issues, licensing requirements). In this blog post, after reviewing the underlying mathematics described in Hallerbach5, I will review a couple of applications of index
  • Higher Volatility, Higher Alpha? [Finominal]

    Intuitively fund managers should create more alpha when volatility is higher However, neither mutual nor hedge fund managers have been able to do so Likely explained by fund managers being less rational than assumed INTRODUCTION However, a period of higher volatility is a good environment for alpha generation and provides opportunities. Robert Prince, CIO Bridgewater Associates,

Quantocracy’s Daily Wrap for 10/29/2023

This is a summary of links featured on Quantocracy on Sunday, 10/29/2023. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Dissecting the Idiosyncratic Volatility Puzzle [Alpha Architect]

    Idiosyncratic volatility (IVOL) is the volatility of a security that cannot be explained by overall market volatilityit is the risk unique to a particular security. IVOL contrasts with systematic risk, which is the risk that affects all securities in a market (such as changes in interest rates or inflation) and, therefore cannot be diversified away. On the other hand, the risks of high IVOL