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Quantocracy’s Daily Wrap for 08/02/2022

This is a summary of links featured on Quantocracy on Tuesday, 08/02/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • The Effective Number of Bets: Measuring Portfolio Diversification [Portfolio Optimizer]

    Many different measures of portfolio diversification have been developed in the financial literature, from asset weights-based diversification measures like the Herfindahl Index1 to risk-based diversification measures like the Diversification Ratio of Choueifaty and Coignard2 to other more complex diversification measures. Because each of these measures usually provides information about a

Quantocracy’s Daily Wrap for 08/01/2022

This is a summary of links featured on Quantocracy on Monday, 08/01/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Slava Ukraini! Latest from Quantocracy contributor in Ukraine: Modeling Dynamics of Entire Implied Volatility Surface [Only VIX]

    There is a very cool webinar coming up next week that I suggest everyone to register and attend link Daniel Bloch, also often listed as Daniel Alexandre Bloch has contributed a lot of research on using ML for options pricing. Also Mr Block published a very thorough free textbook options pricing that I highly recommend to everyone – it reviews and evaluates most of the recent developments in
  • Why GARCH models fail out-of-sample [Artifact Research]

    This is the third post of a short series of posts on extreme events in financial time series. In the first post, we have introduced power-law theory to describe and extrapolate the chance of extreme price movements of the S&P500 index. In the second post, we took a closer look at how statistical moments may become infinite in the presence of power-law tails, rendering common estimators
  • Do Stocks Efficiently Predict Recessions? [Alpha Architect]

    What are the Research Questions? There is abundant literature on the relationship between the business cycle and future stock returns. The traditional view is that stocks are rationally priced to immediately reflect investors expectations about future economic activity and that expected excess returns on stocks are positive, vary over time, and display counter-cyclical behavior. The author asks

Quantocracy’s Daily Wrap for 07/30/2022

This is a summary of links featured on Quantocracy on Saturday, 07/30/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Practical Implementation of Strategic Allocation Bets with Black-Litterman [DileQuante]

    As a portfolio manager or as a portfolio construction analyst, the most usual way to manage a fund is to elaborate a Strategic Asset Allocation (a.k.a. SAA), that is reviewed on a mid or low frequency, on which PM or researchers add their tactical views, i.e. a Tactical Asset Allocation (a.k.a. TAA), which can be refreshed on a higher frequency. The SAA reflects the long term view of

Quantocracy’s Daily Wrap for 07/28/2022

This is a summary of links featured on Quantocracy on Thursday, 07/28/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Hedging long only portfolios using Structural Entropy [Pravin Bezwada]

    This article aims is to evaluate/demonstrate the effectiveness of hedging a long only portfolio of US equities with a short position in Russell 2000 (I used IWM ETF since I dont have rolling future prices) using an extended version structural entropy indicator. I first read about structural entropy in this article. The authors consider financial markets as a complex interconnected correlation
  • Machine learning in macro [Cuemacro]

    There are buzzwords and there are buzzwords. The buzziest (if that indeed is a word) of buzzwords in technology is that of machine learning, whether its using machine learning to improve image recognition, natural language processing etc. Although, Ive got to admit, theres still a long way to go I still repeatedly get advised to apply for FX roles on LinkedIn, which are actually
  • The Expected Returns to ESG-Excluded Stocks [Alpha Architect]

    As Sam Adams and I explained in our new book, Your Essential Guide to Sustainable Investing, while sustainable investing continues to gain in popularity, economic theory suggests that if a large enough proportion of investors choose to favor companies with high sustainability ratings (green businesses) and avoid those with low sustainability ratings (brown or sin businesses), the favored

Quantocracy’s Daily Wrap for 07/22/2022

This is a summary of links featured on Quantocracy on Friday, 07/22/2022. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Copulas and trading strategies [SR SV]

    Reliance on linear correlation coefficients and joint normal distribution of returns in multi-asset trading strategies can be badly misleading. Such conventions often overestimate diversification benefits and underestimate drawdowns in times of market stress. Copulas can describe the joint distribution of multiple returns or price series more realistically. They separate the modelling of
  • Relative Sentiment and Machine Learning for Tactical Asset Allocation: Out-of-Sample Results [Alpha Architect]

    In our last installment, we reviewed the performanceacross four regionsof a machine-learning-based Sentix relative sentiment model for tactical asset allocation. The regions included: the USA, Europe, Japan, and Asia ex-Japan (referred to as USA, EUR, JPN, and AEJ, respectively, in the charts and tables below). The SSRN paper (written in October 2019) that introduced the model showed results
  • Short Sellers Are Informed Investors [Alpha Architect]

    Short sellers play a valuable role in keeping market prices efficient by preventing overpricing and the formation of price bubbles in financial markets. Market efficiency is important because an efficient market allocates capital efficiently. If short sellers were inhibited from expressing their views on valuations, securities prices could become overvalued and excess capital would be allocated to

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