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Quantocracy’s Daily Wrap for 07/18/2022

This is a summary of links featured on Quantocracy on Monday, 07/18/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Slava Ukraini! Latest from Quantocracy contributor in Ukraine: Trading Signals In VIX Futures [Only VIX]

    Marco Avellaneda has contributed tremendously to financial mathematics, and to volatility trading in particular, has passed away earlier this year. Here I will review one of his last papers on trading VIX futures. I think most readers of this blog have modeled VIX futures understand both the risks and potential profitability of roll strategies, and the most difficult part is balancing the two. VIX
  • Correlation Matrix Stress Testing: Shrinkage Toward the Lower and Upper Bounds of a Correlation Matrix [Portfolio Optimizer]

    I previously described on this blog an intuitive way of performing stress tests on a correlation matrix, which consists in shrinking a baseline correlation matrix toward an equicorrelation matrix12. A limitation of this method, though, is that it alters all the correlation coefficients of the baseline correlation matrix, so that it is for example impossible to stress only the correlation between
  • Evaluating Inflation Hedges [Factor Research]

    Despite being different metrics, CPI and breakeven inflation rates exhibited the same trends since 2003 The securities with high betas to inflation come from diverse sectors, not just from energy and commodities Portfolios often feature hidden inflation exposure that should be revealed via factor exposure analysis INTRODUCTION The Bundesbank estimated that Germans hoarded about EUR 200 billion of
  • Can We Measure Inflation with Twitter [Alpha Architect]

    Twitter is an interesting dataset for researchers interested in consumer beliefs. (200 million monthly active users worldwide (Elon Musk may disagree!) and about 10 million active users in Italy in 2019 (AGCOM 2020)). Inflation expectations are at the heart of any consumption and investment decision of households and firms in the economy. There are two commonly used sources of inflation

Quantocracy’s Daily Wrap for 07/14/2022

This is a summary of links featured on Quantocracy on Thursday, 07/14/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Effective Allocation Measure with Entropy Application for Correlated Crypto Assets [Quant at Risk]

    Surprisingly, in the literature there are only few effective formulae for asset allocation. They are based on the asset types and, in theory, they should define investors risk appetite. For instance, a large exposure in stocks should define aggressive investment style in comparison to investing in bond market. While, in general, this approach is true and intuitive, it lacks a quantitative
  • Momentum Everywhere, Including in Factors [Alpha Architect]

    Empirical research, including the 2017 paper A Century of Evidence on Trend-Following Investing, has found momentum to be a persistent and pervasive factor in returns of not only stocks but other asset classes as well, including bonds, commodities, and currencies. Recent empirical research on the momentum factor, including the 2018 studies Factor Momentum Everywhere (Summary) and Is

Quantocracy’s Daily Wrap for 07/11/2022

This is a summary of links featured on Quantocracy on Monday, 07/11/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • The Worst One-Day Shocks and Biggest Geopolitical Events of the Past Century [Quantpedia]

    We dedicated several articles to how we created 100-year history for bonds, stocks, and commodities. Now we analyze the 50 worst one-day shocks and the following days in each of the abovementioned asset classes. In addition to that, we also look at how the Multi-Asset Trend-Following strategy performed during the same periods. Further, the second part of this article focuses on critical
  • Crypto Tokens: Does Security Selection Matter? [Factor Research]

    More than 80% of cryptocurrency tokens trade below their first trading price Tokens are diverse in their functions, but all types have been losing money consistently Token financing seems to be more beneficial for the issuer than investors INTRODUCTION A falling stock market is not bad for everyone. Sure, many investors lose out as their portfolios decline in value, but those who are just starting
  • An Investor s Guide to Crypto [Alpha Architect]

    With a capitalization of $1.3 trillion, cryptocurrencies are now (2022) roughly 50% of the value of US dollars and coins. What was once a fad, has now become prominent and increasingly diverse from an investors point of view. In response, this article discusses five key features and concepts critical to the understanding of the cryptocurrency space from the investors perspective. What are
  • Trend following: combining market and macro information [SR SV]

    Classic trend following is based on market prices or returns. Market trends are relatively cheap to produce, popular, and plausibly generate value in the presence of behavioral biases and rational herding. Macro trends track relevant states of the economy based on fundamental data. They are more expensive to produce from scratch and generate value due to rational information inattentiveness. While

Quantocracy’s Daily Wrap for 07/08/2022

This is a summary of links featured on Quantocracy on Friday, 07/08/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Research Review | 8 July 2022 | Factor Investing [Capital Spectator]

    Investing in Deflation, Inflation, and Stagflation Regimes Guido Baltussen (Erasmus University Rotterdam), et al. July 2022 We examine asset class and factor premiums across inflationary regimes. As periods of high inflation and deflation are relatively uncommon in recent history, we use a deep sample starting in 1875. Moderate inflation scenarios provide the highest returns across asset class and
  • Does Intangible-Adjusted Book-to-Market Work? [Alpha Architect]

    Recent research shows that B/M is losing explanatory power (Asness et al. 2015, Fama-French 2015, Hou et al. 2015). Some have theorized that the decrease in effectiveness in B/M is due to the increasingly large value of intangible assets. Forty years ago the market was dominated by Kodak, General Electric, and Xerox all companies with huge manufacturing businesses with book values built on piles
  • Debt/Equity vs Debt/EBITDA [Quant Dare]

    We all know that the more indebted a company is, the greater the risk of bankruptcy. But what is really the best way to measure this indebtedness? In this post we will compare two of the best known leverage ratios: Debt/Equity (Debt-to-Equity) and Net Debt/EBITDA (Net Debt-to-EBITDA). Leverage Ratios Leverage ratios are financial metrics used to measure the level of debt a company has incurred and

Quantocracy’s Daily Wrap for 07/05/2022

This is a summary of links featured on Quantocracy on Tuesday, 07/05/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Slava Ukraini! Latest from Only VIX, Quantocracy contributor in Ukraine: Nightshares ETFs [Only VIX]

    An innovative company has launched two ETFs to captures the night effect – the difference between stock market returns during the trading day, and when the market is closed. It is a well-documented effect that most of the market gains come overnight returns, and that day returns are relatively flat. The difference in returns is correlated to some fundamental factors, e.g. beta effect, and I am
  • Combining Factors in Multifactor Portfolios [Alpha Architect]

    Christoph Reschenhofer contributes to the factor-based investment literature with his April 2022 paper, Combining Factors, in which he investigated the performance of multifactor portfolios formed via a combination of stock characteristics scores. He began by noting that while the finance literature has made substantial progress in identifying factors that drive stocks risk and return
  • On the origins of some stochastic processes [Quant Dare]

    Stochastic processes play a key role in modelling the behavior over time of many financial assets. These mathematical descriptions of reality help making investment decisions. They can be used to price stock market options, make Monte Carlo simulations or define probabilities of expected returns, among others. In todays post we will explore the origins of two of the most common stochastic
  • Factor Olympics Q2 2022 [Factor Research]

    Value is the clear winner of YTD 2022 Value, Momentum, and Low Volatility factors were positively correlated, which changed to previous years The Quality factor performed worst, which can be explained by a bias towards tech stocks INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years. Specifically, we only present factors where academic

Quantocracy’s Daily Wrap for 06/28/2022

This is a summary of links featured on Quantocracy on Tuesday, 06/28/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • The Yield Game [Grzegorz Link]

    Asset managers are often fixated on predicting the best performing asset in the near future be that a month ahead, six months, a year or two. Of course, it would be great to know what will appreciate in price the most (and subsequently what to invest in right now), but all we can do is predict. And predictions are far from certain. They sometimes if not usually fail. Near-term

Quantocracy’s Daily Wrap for 06/27/2022

This is a summary of links featured on Quantocracy on Monday, 06/27/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Vol targeting: A CA(g)R race [Investment Idiocy]

    Regular listeners to the podcast I ocasionally co-host will know that I enjoy some light hearted banter with some of my fellow podcasters, many of whom describe themselves as 'pure' trend followers, whilst I am an apostate who deserves to be cast into the outer darkness. My (main) sin? The use of 'vol targeting', an evil methodology not to be found in the original texts of
  • Slava Ukraini! Latest from Only VIX, Quantocracy contributor in Ukraine: Curious Periodicity Of VIX Index [Only VIX]

    I was browsing LinkedIn the other day and saw a bar chart of annual average VIX levels, and noticed that they kind of go up and down as if it was a cycle. Intra-day effects of elevated volatility near open and close are well-known, as well as some day-of-week patterns. Seasonal effects of VIX are also obvious – the index tends to be low during summer months, and rise in the autumn months. However
  • Stock Market Valuation and Impact of Inflation [Light Finance]

    If 2022 has taught us anything, it is that our understanding of the inflationary process is woefully incomplete. Increasingly, it seems that the easy money era of the 2010s created a blind spot in the market: stable inflation and ample liquidity were taken for granted. The risk of high (indeed, very high) inflation was deeply discounted which resulted in a significant misallocation of investor
  • Defensive & Diversifying Strategies in YTD 2022 [Factor Research]

    Most defensive and diversifying strategies generated negative returns in YTD 2022 The correlation of almost all of these strategies to equities was too high Only managed futures generated attractive diversification benefits INTRODUCTION Economics and investing are all about data, eg GDP has increased by 1.5% this quarter, the stock market is down 10% this month, and so on. However, despite numbers

Quantocracy’s Daily Wrap for 06/25/2022

This is a summary of links featured on Quantocracy on Saturday, 06/25/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • How I Invest My Own Money: Robust to Chaos [Alpha Architect]

    A lot of people ask me how I invest my own money, and I am always happy to oblige. But I have never discussed the topic in the public (unlike my friend Meb, who has a great post dedicated to the subject). However, this past week Justin and Jack asked if they could grill me on my personal portfolio for their excellent podcast, Excess Returns. You can listen and/or watch the podcast via the
  • The power of macro trends in rates markets [SR SV]

    Broad macroeconomic trends, such as inflation, economic growth, and credit creation are critical factors of shifts in monetary policy. Above-target trends support monetary tightening. Below-target dynamics give grounds for monetary easing. Yet, markets may not fully anticipate policy shifts that follow macro trends, for lack of attention or conviction. In this case, macro trends should predict

Quantocracy’s Daily Wrap for 06/23/2022

This is a summary of links featured on Quantocracy on Thursday, 06/23/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Using Historical Volatility for Parameter Adjustment [Alvarez Quant Trading]

    The AllocateSmartly website often has interesting posts. Recently I was reading the article Trending Fast and Slow and thought about other ideas to test. The article is based on research on trading the SPX and depending on the current historical volatility one would either use a 12-month or a 1-month lookback to decide whether to enter or exit the trade. I had tried similar ideas before but not
  • Can Machine Learning Identify Future Outperforming Active Equity Funds? [Alpha Architect]

    Ron Kaniel, Zihan Lin, Markus Pelger, and Stijn Van Nieuwerburgh contribute to the asset pricing literature with their January 2022 study Machine-Learning the Skill of Mutual Fund Managers in which they used machine learning in the form of an artificial neural network to examine the universe of actively traded U.S. equity mutual funds between 1980 and 2019 and the stocks they hold in order
  • Using Institutional Investor’s Trading Data in Factors [Alpha Architect]

    Can the returns from running factor strategies be enhanced if institutional investors selectively and actively participate? Most of the evidence presented in this paper would suggest the answer is an unqualified YES. The authors argue this would require institutional investors to possess and then capitalize on private information. Consequently, the movement into and out of specific stock positions

Quantocracy’s Daily Wrap for 06/22/2022

This is a summary of links featured on Quantocracy on Wednesday, 06/22/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • From theory to practice: Challenging the market using MPT-based investment strategy [Quant Dare]

    In order to develop complex strategies for a successful asset allocation, portfolio managers need profound knowledge on the field. Apparently, this is the key to be able to consistently beat the market. In this post we will learn how to design investment strategy based in Modern Portfolio Theory in Python. Will we be able to outperform the market? Lets find out! Note that before diving into the