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Quantocracy’s Daily Wrap for 07/02/2021

This is a summary of links featured on Quantocracy on Friday, 07/02/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

Quantocracy’s Daily Wrap for 07/01/2021

This is a summary of links featured on Quantocracy on Thursday, 07/01/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

Quantocracy’s Daily Wrap for 06/29/2021

This is a summary of links featured on Quantocracy on Tuesday, 06/29/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Distance Approach in Pairs Trading: Part I [Hudson and Thames]

    There are many types of approaches you can use in pairs trading, but the Distance Approach is one of the most widely used because of its simplicity. The basic concept is as follows: Using Euclidean squared distance on the normalized price time series, n closest pairs of assets are chosen as pairs. S S D=sum_{t=1}^{N}left(P_{t}^{1}-P_{t}^{2}right)^{2} Then, with selected pairs, if the difference
  • Static optimisation of the best set of instruments to hold in a futures trading system [Investment Idiocy]

    In a couple of recent posts (here and here) I explored the idea of using dynamic optimisation to deal with the following problem: diversification across markets is good, but requires more capital. That didn't work out so well! I can also appreciate that this is *way* beyond most peoples idea of a simple trend following system. And it flies in the face of much I've said in terms of
  • Is Zorro project worth trying for algorithmic trading? [Trading Enigma]

    The online trading platform is growing bigger day by day. More people are entering this industry, and they are trying to come up with unique trading strategies. But automated trading has taken the industry by storm. Automated trading is the best thing an independent trader can ask for. But implementing an automated trading strategy is one big task. It requires deep market research and a lot of
  • Can Investors Beat Active Mutual Funds with Cheap ETFs, YUP! [Alpha Architect]

    The research (and the theory) has convincingly shown that mutual funds should and do underperform a passive index by an amount approximately equal to fees. However, no one has actually tried to construct the active mutual fund dominating passive strategy using commercially available products. It seems like such an obvious test. This study is designed to answer that question on a practical basis.

Quantocracy’s Daily Wrap for 06/28/2021

This is a summary of links featured on Quantocracy on Monday, 06/28/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Paul Novell’s Bond-COMP Tactical Bond Strategy [Allocate Smartly]

    This is a test of a tactical bond strategy from Paul Novell of Investing for a Living. It rotates between credit bond ETFs and defensive assets based on the same rules as his popular SPY-COMP strategy. Backtested results from 1970 follow. Results are net of transaction costs see backtest assumptions. Learn about what we do and follow 60+ asset allocation strategies like this one in near
  • Factor Exposure Analysis: Exploring Residualization [Factor Research]

    Regression analysis is frequently subject to multicollinearity Independent variables can be residualized Using residualized variables in a factor exposure analysis identifies different drivers DISCLAIMER The worth of an econometrics textbook tends to be inversely related to the technical material devoted to multicollinearity Williams, R. Economic Record 68, 80-1. (1992) via Kennedy, A
  • Bayesian vs. Frequentist in Practice, part 3 [Eran Raviv]

    This post is inspired by Leo Breimans opinion piece No Bayesians in foxholes. The saying there are no atheists in foxholes refers to the fact that if you are in the foxhole (being bombarded..), you pray! Leos paraphrase indicates that when complex, real problems are present, there are no Bayesian to be found. A nice illustration for why one would prefer the Bayesian approach over
  • When Persistent Higher Highs Don t Suggest a Pullback [Quantifiable Edges]

    SPX managed to make an intraday high for the 5th day in a row on Friday. An interesting study from the Quantifinder looked at the possible impact of 5 higher highs occurring. The studies examined the impact of the position of the market when the 5 higher highs occurred. I broke it down again over the weekend. I wanted to see all times the 5 higher highs were accompanied by a 50-day high versus
  • A market-to-book formula for equity strategies [SR SV]

    A new proxy formula for equity market-to-book ratios suggests that (the logarithm of) such a ratio is equal to the discounted expected value of (i) differences between return on equity and market returns and (ii) the net value added from share issuance or repurchases. A firm with a higher market-to-book ratio must have lower future returns, higher return on equity, or more valuable growth or

Quantocracy’s Daily Wrap for 06/25/2021

This is a summary of links featured on Quantocracy on Friday, 06/25/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Optimising portfolios for small accounts: Dynamic optimisation testing -> EPIC FAIL [Investment Idiocy]

    This is part two in a series of posts about using optimisation to get the best possible portfolio given a relatively small amount of capital. Part one is here (where I discussed the idea). You should read that now, if you haven't already done so. In this post I show you and explain the code and methodology used for the backtesting of this idea, and look at the results. The code is in my open
  • Research Review | 25 June 2021 | Tail Risk [Capital Spectator]

    Equity Tail Risk in the Treasury Bond Market Mirco Rubin (EDHEC) and Dario Ruzzi (Bank of Italy) December 23, 2020 This paper quantifies the effects of equity tail risk on the US government bond market. We estimate equity tail risk as the option-implied stock market volatility that stems from large negative jumps as in Bollerslev, Todorov and Xu (2015), and assess its value in reduced-form

Quantocracy’s Daily Wrap for 06/24/2021

This is a summary of links featured on Quantocracy on Thursday, 06/24/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Introducing: Arbitragelab Tear Sheets [Hudson and Thames]

    Pairs selection is the first crucial step to building a pairs trading strategy. And it is no surprise, to perform it correctly, one must diligently examine, compare and contrast numerous test results, graphs and characteristics. For example, cointegration analysis alone can be performed in one of two methods utilizing the Engle-Granger approach or the Johansen approach. To truly have the
  • Return based quality factor on Warsaw Stock Exchange [Mateusz Dadej]

    Recently I ran across an interesting paper published by National Bureau of Economic Research entitled Return Based Measue of Firm Quality. I happen to have a suitable data and thought why not reproduce it on data from polish stock exchange in the free time. It turned out not so bad and thanks to being not filled with boring mathematical formulae I guess its also pretty accessible. At the
  • An Introduction to Unsupervised Learning for Trading [Quant Insti]

    In the previous blogs, we examined supervised learning algorithms like linear regression in detail. In this blog, we look at what unsupervised learning is and how it differs from supervised learning. Then, we move on to discuss some use cases of unsupervised learning in investment and trading. We explore two unsupervised techniques in particular- k-means clustering and PCA with examples in Python.
  • A Sensible Approach to Bitcoin [Dual Momentum]

    Last year when bitcoin had its fourth drawdown of 80% in the past ten years, I thought It might be a good time to reenter that market. Having traded digital assets in 2017, I was familiar with the reasons for owning bitcoin. I wont reiterate them here. You can find information on bitcoin, blockchain, and decentralized finance (DeFi) here, here, here, and here. Every disruptive technology, like

Quantocracy’s Daily Wrap for 06/23/2021

This is a summary of links featured on Quantocracy on Wednesday, 06/23/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Replicating the J.P. Morgan Efficiente Index [Portfolio Optimizer]

    The J.P. Morgan Efficiente 5 Index is a tactical asset allocation strategy designed by J.P. Morgan based on a broad universe of 13 ETFs. This post will illustrate how to replicate this strategy with Google Sheets. Notes: A fully functional spreadsheet corresponding to this post is available here. Credit were credits due: I first discovered this strategy on AllocateSmartly. Strategy
  • Improving crypto investing with Reinforcement Learning [Quant Dare]

    Cryptocurrencies are a hot topic in the investing world, but is it possible to create an investment methodology combining modern Reinforcement Learning with classical indicators? Along this blog we have covered topics such as how to automate cryptocurrencies investment or whether reinforcement learning is suitable for trading. In this post, we try to combine Reinforcement Learning with a

Quantocracy’s Daily Wrap for 06/22/2021

This is a summary of links featured on Quantocracy on Tuesday, 06/22/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Pairs Trading with Stochastic Control and OU process [Hudson and Thames]

    The concept of pairs trading is pretty straightforward. As described in [Gatev et al. (2006)], we first find two stocks that have moved together historically and then monitor the spread between these stocks. If the prices of the two stocks diverge, we short the winner and go long on the loser, hoping that these prices converge in the future. If the spread is mean reverting, it will revert to its
  • Private Equity: Is There Anything Special There? [Alpha Architect]

    As the following table demonstrates, since its inception in the 1970s, the private equity industry has grown significantly. According to Preqin data, there are now more than 18,000 private equity funds, with assets under management exceeding $4 trillion. Source: NACUBO endowment studies, FY 1987-2019 When deciding on whether to allocate capital to private equity, investors should consider whether

Quantocracy’s Daily Wrap for 06/21/2021

This is a summary of links featured on Quantocracy on Monday, 06/21/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Portfolio Optimization: Replicate a corporate bond index via Mixed-Integer Programming [DileQuante]

    While portfolio optimization is well known in the Equity space, in the Fixed Income industry, the subject is less discussed although it has very specific needs and it can be more complex compared to its Equity counterparts. One key difference between the two of them is the trading lot size. In Equities, most of the time, you can generate a portfolio composition directly with weights (continous
  • Avoiding Disasters with Catastrophe Bonds? [Factor Research]

    Catastrophe bonds offered exceptionally high risk-adjusted returns since 2005 These were uncorrelated to equities, making cat bonds attractive for diversification However, cat bonds might have underpriced risk historically, raising concerns going forward INTRODUCTION The global pandemic continues to be a catastrophe for our civilization. Compounding its effect: Few were insured against it. Sure,
  • Factors Timing is a Difficult Practice [Alpha Architect]

    Last week Tommi looked into whether hedge funds could time factors. The conclusion? Probably. This week we're going to see if Mutual Fund managers have any skill at cracking the factor timing code. The conclusion? They aren't great factor timers! The authors of the paper study a large sample of US equity mutual funds from late 2000 through 2016 and ask the following research question: Do

Quantocracy’s Daily Wrap for 06/19/2021

This is a summary of links featured on Quantocracy on Saturday, 06/19/2021. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Buy&Hold? No, Buy&Sell! [Financial Hacker]

    Theres no doubt that buying and holding index ETFs is a long-term profitable strategy. But it has two problems. It does not reinvest profits, so the capital grows only linearly, not exponentially. And it exposes the capital to the full rollercoaster market risk. A sure way to go out of the market in a downtrend, and invest the profits back in an uptrend would be (almost) priceless. Markos
  • Many explanations for the same fact [Alex Chinco]

    Asset-pricing research consistently produces many different explanations for the same empirical facts. As a rule of thumb, you should expect asset-pricing researchers to wildly overachieve. Behavioral researchers can typically point to several psychological biases which might explain the same anomaly. e.g., it is possible to argue that the excess trading puzzle is due to a preference for gambling,