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Quantocracy’s Daily Wrap for 08/04/2015

This is a summary of links featured on Quantocracy on Tuesday, 08/04/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Expensive Junk Stocks are Killing High-Quality Value Stocks, YTD [Alpha Architect]

    In general, investors focused on affordable stocks with strong fundamentals have been taken to the cleaners year-to-date. Meanwhile, expensive stocks with poor fundamentals have been rocking! Some Basic Statistics: Below we document some core performance figures using Ken Frenchs data on value/growth portfolios (proxy for cheap/expensive) and high profi
  • 2 Ways to Lower Portfolio Drawdown [Flirting with Models]

    The financial crisis of 2007 to 2009 highlighted the importance of downside risk management. Many managers that protected capital during this period saw their AUM balloon. Some of these same managers underperformed in the post-crisis years. This underperformance should be anything but surprising. We often compare tactically risk-managed strategies to uncertain

Quantocracy’s Daily Wrap for 08/03/2015

This is a summary of links featured on Quantocracy on Monday, 08/03/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • VIX Trading Strategies in July [Volatility Made Simple]

    We've tested 23 simple strategies for trading VIX ETPs on this blog (separate and unrelated to our own strategy). And while I can't speak for all traders, based on all of my readings both academic and in the blogosphere, the strategies we've tested are broadly representative of how the vast majority of traders are timing these products. There was a wide disparity in the per
  • The Ornstein-Uhlenbeck process and pairs trading [MKTSTK]

    Perhaps the most widely known form of statistical arbitrage is called Pairs Trading. In this general strategy, we start first by picking two stocks which are highly related to one another (either by correlation, cointegration, or both). One method for finding such pairs is to use a network graph like a Minimum Spanning Tree. A filtered correlation network quickly summarizes the set of a
  • Daily Academic Alpha: Warren Buffett Market Predictions [Alpha Architect]

    Last week we had a fairly long post on a valuation based asset allocation strategy that might actually work. This post followed a couple of other research projects on the issue, which showed limited evidence for simple valuation-based timing strategies. Now there is a new paper on Warren Buffetts favorite timing mechanism, Market Cap/ GNP (or GDP). Weve discussed this met
  • Backtesting in Excel: Adding a Stop Loss [Quants Portal]

    In my previous article I went over how to add a position sizing rule and in this one I will complete homework exercise 2: adding a stop loss and trailing stop loss. Adding a stop loss in R is way easier than building it into Excel, I had to think for some time as to how I was going to break it down in the spreadsheet. First calculate daily returns followed by a column to as
  • Prepared: Market Breakout or Breakdown? [Flirting with Models]

    This week we received an email from an advisor that echoes some calls weve been receiving lately. We thought it would make a great topic for us to cover in our commentary this week. The email read: Were seeing a lot of negative indicators in the market right now, and seeing commentary from other managers changing from pessimistic to dire warnings of impen
  • A Quant’s view of CFA Level I [Turing Finance]

    Having just written and, thankfully, passed the CFA Level I exam I wanted to take this opportunity to share my experience writing the CFA Level I exam given that I come from an unconventional academic background and work in the industry as a quantitative analyst. I also want to share some helpful online resources with would-be CFA Level I candidates who might find the quantitative meth
  • Sizing Up the Size Premium (h/t @Abnormal Returns) [Gerstein Fisher]

    Since Rolf Banz published his groundbreaking paper that identified the so-called small stock effect in 1981, the investment community has acknowledged the existence of a return premium afforded to smaller-capitalization stocks over their larger counterparts. Banzs study demonstrated that between 1926 and 1980, the smallest quintile of the stocks on the New York Stock Exchange outperf
  • Do the VIX Futures Know More Than the S&P 500? [Factor Wave]

    A while ago I wrote a post, "Does the VIX Know More Than the S&P 500?", and concluded "when the VIX and the S&P 500 are both up on the day sell the stocks, either through the futures of an ETF. " An astute reader, Leo Cheng, pointed out that the VIX index has a certain degree of predictability (mean reversion, clustering and calendar effects) and these effects are pri
  • The Carry Trade Defies Theory [Larry Swedroe]

    The success of the carry trade strategy has led to its widespread proliferation, despite the fact that it contradicts economic theory. In short, this strategy involves borrowing (going short) a currency with a relatively low interest rate and using the proceeds to purchase (going long) a currency yielding a higher interest rate, capturing the interest differential. It can be enhanced

Quantocracy’s Daily Wrap for 08/02/2015

This is a summary of links featured on Quantocracy on Sunday, 08/02/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

Quantocracy’s Daily Wrap for 08/01/2015

This is a summary of links featured on Quantocracy on Saturday, 08/01/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Quantocracy’s Best Links in July [Quantocracy]

    The best links for the month of July, as voted by our readers: P/E Attention Strategies Earn Monthly Excess Return of 1% [Alpha Architect] Back to Fundamentals [Dual Momentum] New Paper from Markowitz: Introducing the Gerber Statistic [Flirting with Models] Video: James Simons Numberphile [YouTube] All Strategies Blow Up [Gest

Quantocracy’s Best Links in July

The best links for the month of July, as voted by our readers:

We need to vote more folks. About 1% of clickthroughs result in a vote. That’s just not enough. A vote doesn’t necessarily mean a link is the greatest of all time, it simply means that it’s good and deserves to be read by others. So let your voice be heard and encourage bloggers to write quality content. We do our part by providing this site gratis. All we ask is that you take a moment to participate in the process.

If you haven’t done so already, we invite you to register to vote. Once registered, you can choose to remain logged in indefinitely, making voting as simple and painless as possible.

Read on Readers!
Mike @ Quantocracy

Quantocracy’s Daily Wrap for 07/29/2015

This is a summary of links featured on Quantocracy on Wednesday, 07/29/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Synchronicity [MKTSTK]

    Recently we read an excellent article on investing from Alpha Architect entitled One way to beat the market? Be different! In the article, the author shows how thinking differently from the pack can provide better performance for your investment portfolio. As often happens with lateral thinking, this article stimulated our thinking from an HFT point of view. How can thinkin
  • Trading the VIX over the Fed Announcement [Factor Wave]

    "Buy the rumor, sell the fact" is an over-used phrase traders say to describe the way the equity markets get excited by future events then lose steam when the event actually happens. Because the VIX is strongly negatively correlated with the equity markets, this could be changed to "sell the VIX before an event, buy it afterwards". In this case the event is the Fed
  • The Information from Insiders [Factor Wave]

    One of the things that everyone knows to be true is that the trades of company insiders convey valuable information. But is this really true? And are some types of trades more informative than others? If you can get hold of the relevant data, this is the sort of question that is very amenable to statistical analysis. David Cicero and Babajide Wintoki did this exercise in
  • Dynamic Markowitz Efficient Frontier [Quant Dare]

    Markowitz Model is a famous method allocated in the Portfolio Investment Theory. This model provides efficient portfolios, i.e. portfolios with the highest rentability and lowest risk possible through mathematical programming. The set of portfolios composes the efficient frontier. The strategy is based on cuadratic optimization minimazing the estimated risk and opposite rentability. The
  • Australia All Ords Steady Vol Strategy [John Orford]

    In a round about way from New York to Singapore, I landed in Oz in 2012. It was like walking into a pre '08 New York or Ireland with funnier accents. They call '08 the 'GFC' or the 'Global Financial Crisis' and talk about it in a sort of detached way – because that tidal wave never hit their shores. In any case, the 'Volatility Fighter' reminded me
  • Algorithm Aversion – Why people don’t follow the model! [Alpha Architect]

    There are many studies showing that models beat experts, including the meta-study Clinical versus mechanical prediction: A meta-analysis by Grove et al. (2000). However, given this knowledge that models beat experts, forecasters still prefer to use the human (expert) prediction as opposed to using the model. Why is this? A recent paper by Dietvor
  • Simple volatility rebalancing strategy [Volatility Fighter]

    In my posts, I often mention a volatility rebalancing strategy. Originally, this strategy supposed to rebalance a portfolio daily to local volatility measured by standard deviation. I strongly suspect, that a common retail investor will stop trying to understand this strategy right after words "standard deviation", so I propose a simplified version of this strategy. My purp

Quantocracy’s Daily Wrap for 07/28/2015

This is a summary of links featured on Quantocracy on Tuesday, 07/28/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Momentum Crashes [Quants Portal]

    Seminal work by Jegadeesh and Titman (1993) found that past winners outperform past losers over a horizon of 3-12 months. Investors thus take a long position on winner stocks and a short position on loser stocks in order to realise anomalous profits. This strategy is widely adopted and appears to be timeless in terms periodically not functioning but never completely disappearing. This p
  • Sports Betting used to explain Value and Momentum Effects [Quantpedia]

    I use sports betting markets as a laboratory to test behavioral theories of cross-sectional asset pricing anomalies. Two unique features of these markets provide a distinguishing test of behavioral theories: 1) the bets are completely idiosyncratic and therefore not confounded by rational theories; 2) the contracts have a known and short termination date where uncertainty is resolved th
  • Liquidity Premium Diminishing [Larry Swedroe]

    Liquidity can be described as the ability to trade a large number of investments quickly, at low costs and when you want to. Because it is a priced risk, liquidity and its associated price effects are an important aspect of financial markets. In illiquid markets, such as the private equity market, discounts are large and pervasive. Publicly traded equity, howev
  • [Academic Paper] Risk Premia in Option Markets [@Quantivity]

    Risk Premia in Option Markets

Quantocracy’s Daily Wrap for 07/27/2015

This is a summary of links featured on Quantocracy on Monday, 07/27/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • One way to beat the market? Be different! [Alpha Architect]

    This study was inspired by Ben Carlsons blog post a few months ago. Ben highlights Robert Hagstroms book The Warren Buffett Portfolio. The high level question is the following: How can one beat the market? Answer: To beat the market, you have to be different than the market. One simple way to do this is to hold a small number of stocks. But is
  • Improve the Simple Gap Strategy Part 4 [System Trader Success]

    In the last article of this series, Improving The Simple Gap Strategy Part 3, I tested a price-based filter on the in-sample data. This filter was based upon the price action of the previous trading day. During this test we discovered that if the previous trading day was a down-day we could open a Simple Gap trade today. On the other hand, if the previous trading day was an up-day we sh
  • The Media and Stock Returns [Factor Wave]

    I recently had a disagreement with a trader friend. He said CNBC has become a waste of time to have on. I said it has always been a waste of time to have on. His point was that there are times when has been able to give him ideas about what stocks to follow. He thought it was self-evident that stocks that were in the news would outperform the market. My guess was that it was all just ra
  • Momentum vs Moving Averages [Flirting with Models]

    Summary Trend-following is one of the oldest investment methods Labeled as technical analysis, trend-following went largely un-researched by academics Research of cross-sectional momentum exploded after Narasimhan Jegadeesh and Sheridan Titman published their seminal 1992 study, but time-series momentum remained largely ignored until after 2008
  • Low Vol vs High Beta Premium [John Orford]

    Low volatility stocks are better than those with high betas, right? Wrong! Completely and utterly wrong. High betas are costlier because as not-very-many point out – convexity or gamma is important! When the S&P is doing well the high beta index has a beta of 1.84 and when it's doing badly, 1.81. A +0.025 spread. It's a sm
  • SPX Strangle – High Loss Threshold – 73 DTE [DTR Trading]

    This post looks at selling one-lot options strangles on the S&P 500 Index (SPX), initiated at 73 days-to-expiration (DTE). The results in this post were derived from more than 2300 individual trades entered by the backtester. Other 73 DTE variations will be posted on my Twitter feed, @DTRTrading. For background on the setup for the backtests, as well as the nomenclature u