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Quantocracy’s Daily Wrap for 05/10/2020

This is a summary of links featured on Quantocracy on Sunday, 05/10/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Online Portfolio Selection: Mean Reversion [Hudson and Thames]

    Mean Reversion is an effective quantitative strategy based on the theory that prices will revert back to its historical mean. A basic example of mean reversion follows the benchmark of Constant Rebalanced Portfolio. By setting a predetermined allocation of weight to each asset, the portfolio shifts its weights from increasing to decreasing ones. This module will implement four types of mean

Quantocracy’s Daily Wrap for 05/08/2020

This is a summary of links featured on Quantocracy on Friday, 05/08/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • How to Hedge a Portfolio with Put Options [Robot Wealth]

    There are 2 good reasons to buy put options: because you think they are cheap because you want downside protection. In the latter case, you are looking to use the skewed payoff profile of the put option to protect a portfolio against large downside moves without capping your upside too much. The first requires a pricing model. Or, at the least, an understanding of when and under what conditions
  • Machined risk premia [OSM]

    Over the last few posts, weve discussed methods to set return expectations to construct a satisfactory portfolio. These methods are historical averages, discounted cash flow models, and risk premia. our last post, focused on the third method: risk premia. Using the Capital Asset Pricing Model (CAPM) one can derive the required return for a particular asset based on the market price of risk, the

Quantocracy’s Daily Wrap for 05/07/2020

This is a summary of links featured on Quantocracy on Thursday, 05/07/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • When endogenous risk management isn’t enough: a simple risk overlay [Investment Idiocy]

    "How does your risk management work?" … is a question I'm frequently asked. In fact this is actually a difficult question, if you were to look at my open source python backtesting project pysystemtrade, you would struggle to point at a piece of code and say "Behold! Right there, that's the risk management part alright!". The reason is that the risk management in my
  • Backtesting ESG Factor Investing Strategies [Quantpedia]

    Socially Responsible Investing (also called ESG Factor Investing) grows in popularity. More and more investors enter the stock market not just to invest their savings, but they are also want to support companies that bring positive social or environmental change. ESG factor investing can bring satisfaction to those investors. But does it also brings a real outperformance in a financial sense? Is
  • The Size Effect in Multifactor Portfolios [Alpha Architect]

    The lack of a statistically significant size premium in the U.S. since the publication of Rolf Banzs 1981 paper, The Relationship Between Return and Market Value of Common Stocks, published in the Journal of Financial Economics, led many investors to question its use in building portfolios. This conclusion is typically arrived at by considering the standalone performance of the size

Quantocracy’s Daily Wrap for 05/06/2020

This is a summary of links featured on Quantocracy on Wednesday, 05/06/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Sentiment analysis: ifo business climate data [Grzegorz Link]

    Sentiment analysis is one of the investing tools I'm most fond of. There are multiple ways of measuring sentiment: from basic investor surveys to advanced text mining techniques, but one of the most robust and long-term datasets is ifo Institute's business climate sentiment polls.[4] Sentiment analysis: ifo business climate data The data is available from 1991 (Germany's
  • Can neural networks predict the stock market just by reading newspapers? [Quant Dare]

    Markets are said to be driven by randomness, but this does not imply that they are 100% random and thus, completely unpredictable. In the end, there are always people behind investments and many of them are making decisions based on what they read in newspapers. We will be trying to estimate the returns of a time series, namely Bitcoin, only using text data from relevant articles. BERT, an NLP
  • How to download fundamentals data with Python (h/t @PyQuantNews) [TheAutomatic.net]

    In this post we will explore how to download fundamentals data with Python. Well be extracting fundamentals data from Yahoo Finance using the yahoo_fin package. For more on yahoo_fin, including installation instructions, check out its full documentation here. Getting started Now, lets import the stock_info module from yahoo_fin. This will provide us with the functionality we need to scrape
  • Pairs Trading Literature Review [Robot Wealth]

    This post summarises the key lessons of the academic literature that has been published on pairs trading. The key themes are highlighted at the end of the page. Pair Trading Literature Review Gatev, Goetzmann, Rouwenhorst Pairs Trading: Performance of a Relative Value Arbitrage Strategy https://papers.ssrn.com/sol3/papers.cfm?abstract_id=141615 This is the first meaningful academic paper

Quantocracy’s Daily Wrap for 05/05/2020

This is a summary of links featured on Quantocracy on Tuesday, 05/05/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Using Aggregate TAA Allocation as a Tool for Timing the Market [Allocate Smartly]

    We track 50+ public Tactical Asset Allocation (TAA) strategies. A unique feature of our platform is that we show the aggregate allocation across all of those strategies each day (member link). For example, the graph below shows the aggregate allocation year to date by category of asset. Note the increase in defensive allocation (ex. bonds) and decrease in risk allocation (ex. stocks) as the most
  • Cheap vs. Expensive Factors: Does Valuation Matter for Future Returns? [Alpha Architect]

    Tesla (TSLA) breached the $100 billion market capitalization in January 2020 and became the most valuable car manufacturer globally. However, valuing the company is challenging given the growth profile, complexity of the business, and erratic CEO. It is not yet profitable and cash flow is negative, which means that traditional valuation metrics based on historical data are currently less
  • Overnight and Intraday SPX returns [Robot Wealth]

    One of the things Ive noticed from staring at the screen all day for the last few months is that most of the large negative returns in US stock indexes have come overnight. What do you mean by overnight? The core stock trading session for US stocks is between 9:30 am and 4 pm Eastern Time. Thats when most stock market transactions take place. When we look at daily OHLC (Open High Low
  • LSTM Networks: Can They Predict Equity Index Prices? [Quant Insti]

    In this article, we will study a deep learning framework based on recurrent neural networks to predict daily equity index price movements. Specifically, the focus will be on long short-term memory (LSTM) networks – which are a type of recurrent neural network. Different types of inputs and network architectures will be studied to determine their effect on predictability. We will see that with a
  • Why Passively Investing in Active Methods May Not Work [Alpha Architect]

    In this piece, David Blitz provides an interesting perspective on using the passive framework as a blueprint for constructing active (ETF-like) products. The article is not an empirical (no charts!) nor a theoretical (no analytics) analysis, but is focused on just one question: Is it efficient to implement an active strategy by using passive investing techniques, that is, to first turn the active

Quantocracy’s Daily Wrap for 05/04/2020

This is a summary of links featured on Quantocracy on Monday, 05/04/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Using Apache Airflow to Extract CoT Data [Robot Wealth]

    In todays post we are going to be extracting CoT (Commitment of Traders) reports from the CFTC website using a pipeline built on Apache Airflow. What is CoT data? The CoT report is a weekly publication which reports the open positions of market participants in the U.S futures market. Its published every Friday at 3:30 E.T but the actual report from the participants is compiled on the same
  • Online Portfolio Selection: Momentum [Hudson and Thames]

    Today we will be exploring the second chapter of our newest online portfolio selection module, momentum. Momentum strategies have been a popular quantitative strategy in recent decades as the simple but powerful trend-following allows investors to exponentially increase their returns. This module will implement two types of momentum strategies with one following the best-performing assets in the
  • Value Crashes: Deep History [Two Centuries Investments]

    Value investing is struggling big time! As of March 2020, Value factor is down -51% from the peak reached 14 years ago. It is the longest and largest drawdown in values recent history. Many value investors have already rotated into growth. The remaining diehards also want to quit. Even Warren Buffett is selling. Source: Professor French Source: Professor French Is value investing dead? In the
  • Market Profile Chart in Octave [Dekalog Blog]

    In a comment on my previous post, visualising Oanda's orderbook, a reader called Darren suggested that I was over complicating things and should perhaps use a more established methodology, namely Market Profile. I had heard of Market Profile before Darren mentioned it, but had always assumed that it required access to data that I didn't readily have to hand, i.e. tick level data. With my
  • Merger Arbitrage: Arbitraged Away? [Factor Research]

    As AUM in merger arbitrage has increased, alpha decreased Investors can access merger arbitrage via hedge funds, bank indices, and ETFs The strategy is not as uncorrelated from equities as likely perceived by allocators INTRODUCTION Working in the restructuring team of a corporate finance boutique is like being a trader focused on short-selling. Most money is made when companies falter, and stocks
  • Equilibrium theory of Treasury yields [SR SV]

    An equilibrium model for U.S. Treasury yields explains how macroeconomic trends and related expectations for future short-term interest rates shape the yield curve. Long-term yield trends arise from learning about stable components in GDP growth and inflation. They explain the steady rise of Treasury yields in the 1960s-1980s and their decline in the 1990s-2010s. Cyclical movements in yields

Quantocracy’s Daily Wrap for 05/01/2020

This is a summary of links featured on Quantocracy on Friday, 05/01/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Tactical Asset Allocation in April: Stubbornly Defensive [Allocate Smartly]

    Tactical Asset Allocation (TAA) dodged the worst of the bear in February and March, but trailed the big bounce in April. Entering May, TAA remains stubbornly defensive. We track 50+ TAA strategies sourced from books, papers, etc., allowing us to draw broad conclusions about TAA as a style. In the table below we show the MTD and YTD returns of these 50+ strategies: TAA is designed to earn its keep
  • Performance After 10% Up Months [Quantifiable Edges]

    April finished with a 12.7% gain for the SPX. That is the strongest 1-month gain since January of 1987. In last nights subscriber letter I decided to look back at all other instances following 1-month SPX (or its predecessor the S&P 90) gains of 10% or more. The table below shows all instances since 1928. 2020-05-01 The averages, medians, and % wins all look very mild, suggesting there may
  • What’s the Story Behind EBIT/TEV? [Alpha Architect]

    A common question we receive at Alpha Architect is the following: Why do you focus on EBIT/TEV as a value screen for stocks instead of the more traditional measures such as book to price? In short, we believe stocks are ownerships in businesses (I know that sounds crazy coming from a quant shop!). As systematic business buyers, we want a valuation metric (or set of metrics) that, 1) make economic

Quantocracy’s Daily Wrap for 04/30/2020

This is a summary of links featured on Quantocracy on Thursday, 04/30/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Using random forest to model limit order book dynamic [R Trader]

    In this article I use the random forest algorithm to forecast mid price dynamic over short time horizon i.e. a few seconds ahead. This is of particular interest to market makers to skew their bid/ask spread in the direction of the most favorable outcome. Most if not all the literature on the topic (see references below) focuses on applying straight out of the box algorithm to create forecast at
  • The VIX Futures Basis [Robot Wealth]

    In the eye of the recent storm, with VIX up over 50, many traders were looking to short the VIX using products like TVIX. Surely its going to coming back down? Well yeah, it will, eventually, but that doesnt mean that you can profitably short VIX products. First, some basics What is VIX? VIX is a benchmark index for SPX volatility. It shows the SPX options markets expected
  • Understanding Neural Networks (with Graphs) [Quant Dare]

    Artificial Neural Networks (ANN) have been applied with success to many daily tasks that needed human supervision, but due to its complexity, it is hard to understand how they work and how they are trained. Along this blog, we have deeply talked about what Neural Networks are, how they work, and how to apply them to problems such as finding outliers or forecasting financial time series. In this

Quantocracy’s Daily Wrap for 04/28/2020

This is a summary of links featured on Quantocracy on Tuesday, 04/28/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • How to Design Intraday Algo-Trading Model for Cryptocurrencies using Bitcoin-based Signals? [Quant at Risk]

    With a growing popularity of cryptocurrencies and their increasing year-over-year traded volumes, crypto algo-trading is a next big thing! If you study this market closely you will notice that it offers quick gains in much shorter unit of time comparing to stocks or FX. No wonder why a participation in trading, even using mobile apps like Coinbase or Binance attracts more people now than ever. A
  • Overnight Risk Premium in Equity and Commodity Markets [Philipp Kahler]

    Over the last 20 years equity markets and ETFs did a significant part of their total performance over night. This article will examine the relationship of in-session moves vs. the out-of-session moves of ETFs and commodities. The overnight risk premium As an investor you can expect to get paid for taking risk. If someone sell its stock to you he gets the risk free return for holding cash, but you
  • Ways to Measure Extreme Downside Risk [Alpha Architect]

    Larry Swedroe recently wrote a post titled Is there a Tail Risk Premium in Stocks. This post is a good complement to Larrys as this paper proposes two new measures of systematic tail risk and explores whether they are associated with a significant risk premium. The first measure, Extreme Downside Correlation (EDC), is based on the tendency of stock returns to crash at the same time as the

Quantocracy’s Daily Wrap for 04/27/2020

This is a summary of links featured on Quantocracy on Monday, 04/27/2020. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Introducing Online Portfolio Selection [Hudson and Thames]

    Online Portfolio Selection is an algorithmic trading strategy that sequentially allocates capital among a group of assets to maximize the final returns of the investment. Traditional theories for portfolio selection, such as Markowitzs Modern Portfolio Theory, optimize the balance between the portfolios risks and returns. However, OLPS is founded on the capital growth theory, which solely
  • VIX – Simple and Intuitive Explanation of Volatility Index [Only VIX]

    Few years ago I published two post trying to give simple explanations and intuition behind complicated formulas used for calculating vol indexes. However few of you emailed that some charts are missing from these older posts, and for technical reasons since I could not restore them, I decided to re-created new charts from scratch, and re-write the posts. In this post I will make many
  • Tranching, Trend, and Mean Reversion [Flirting with Models]

    In past research we have explored the potential benefits of how-based diversification through the lens of pay-off functions. Specifically, we explored how strategic rebalancing created a concave payoff while momentum / trend-following created a convex payoff. By combining these two approaches, total portfolio payoff became more neutral to the dispersion in return of underlying assets. We have also
  • Tail Risk Hedge Funds [Factor Research]

    Tail risk funds tend to be most in demand when they are least attractive Short-term bonds provided similar benefits to tail risk funds The TAIL ETF closely replicates the performance of tail risk funds INTRODUCTION In a year where the S&P 500 lost more than 30% in a few weeks, there are few headlines that draw as much attention as these: This Black Swan Trade Saw 1,000% Profits This Week