Happy New Year to all our readers! We look back at the performance of our trend following index over last year. Despite closing on a low for the month, the strategy’s performance was positive for 2015. Below is the full State of Trend Following report as of last month. Performance is hypothetical.

Whatever software we’re using for automated trading: We all need some broker connection for the algorithm to receive price quotes and place trades. Seemingly a simple task. And almost any broker supports it through a protocol such as FIX or REST, through an automated platform such as MT4™, or

Recently I had the privilege to attend the Python for Quants conference in London via live streaming. Each time I attend this series of lectures I try to capture one of the presentations in writing, this time I will be writing on a lecture given by Dr James Munro titled "Quant Strategies: from

I have a love-hate relationship with sin stocks. On one hand, my first big winning stock pick was Swisher Sweet Cigars, which nearly doubled a month after I bought it in 1998, thus proving that I was a stock picking genius and much self-satisfaction (at least until several years later when I lost

Wednesday and Thursday were a tough way for the indices to finish the year. In the study below I show other times where the SPX closed down on the last two days of a quarter. I found that when the last two days were down, but the quarter was still positive, there appeared to be a strong upside

Happy New Year 2016! We start with this first State of Trend Following report to see that December closed down, with the index slightly positive for the year. 2015 was up-and-down. What will 2016 bring? Please check below for full results. Detailed Results The figures for the month are: December

Interest rates, which have sat at or near historical lows during the past seven years, have led many investors to seek additional yield in the form of credit risk. The recent trend, and its popularity, gives us an opportunity to determine if this risk historically has been rewarded by examining the

The top three for the year are: Out-of-sample data snooping Code for my yield curve forecasting paper Review of a couple of books I personally enjoyed the most writing a few words on ML estimation, and about those great statistical discoveries. Since the last post did not involve any code or images

The best quant mashup links for the week ending Saturday, 01/02 as voted by our readers. Three Value Investors Meet in a Bar [Investor’s Field Guide] State Space Models and the Kalman Filter [Quant Start] Trend Following In Financial Markets: A Comprehensive Backtest [Philosophical Economics]

As 2016 started, we wish you and your family a great year ahead. Happy New Year! This post is a continuation of our discussion on swap and VBA swaption pricing, and a conclusion of this topic. In a previous article, we introduced a VBA object oriented architecture to price a swap. Here we expose how

In the first post in this series, I explored mean reversion of individual financial time series using techniques such as the Augmented Dickey-Fuller test, the Hurst exponent and the Ornstein-Uhlenbeck equation for a mean reverting stochastic process. I also presented a simple linear mean reversion

“My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: ‘How do I keep from losing everything?’ If you use the 200-day moving average rule, then you get out. You play

The Ivy Portfolio spreadsheet track the 10 month moving average signals for two portfolios listed in Mebane Faber’s book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term

Random portfolios deliver alpha relative to a buy-and-hold position in the S&P 500 index – even after allowing for trading costs. Random portfolios will serve as our benchmark for our future quantitative equity models. The evaluation of quantitative equity portfolios typically involves a

The week between Christmas and New Year’s is often a quiet one that is not prone to large-move days. So strong rallies like we saw on Tuesday are a bit unusual this time of year. I looked back to 1970 to see what has followed other times when SPX rose over 1% on a day between Christmas and New

Bill, Ernie and Sam—three lifelong value investors—met in a bar on November 30th, 2015. Bill was despondent. He’d underperformed the market by -47% over the past 10-years and was questioning his very belief in value. Ernie was happier. He’d done poorly in 2015, but over the last ten years

The efficient market hypothesis suggests that stock prices are always “right” in the sense that stock prices reflect all available information. Of course, during tax season, fundamentals go out the window: I’m selling my losers, and letting my winners ride! And I’m not the only investor

I provide a novel risk-based explanation for the profitability of momentum strategies. I show that the past winners and the past losers are differently exposed to the upside and downside market risks. Winners systematically have higher relative downside market betas and lower relative upside market

Having been a full-time academic financial economist in a former life (still dabble, when able), I became accustomed to my annual pilgrimage to the annual American Finance Association (AFA) meeting. For the uninitiated, the AFA annual meeting is a gathering of all the major brainpower in academic

In the previous installment in this series of analyzing a globally diversified portfolio we reviewed the results after adding a momentum-based risk-management system. The test suggested that a tactical overlay can be productive… maybe, depending on the details. Let’s continue to investigate our

To date in our time series analysis posts we have considered linear time series models including ARMA, ARIMA as well as the GARCH model for conditional heteroskedasticity. In this article we are going to consider the theoretical basis of state space models, the primary benefit of which is that their

This commentary is available for download here. There is an adage on Wall Street that comes around every January. And every January, we debunk it. In As Goes January, So Goes the Year, we remind readers that while the performance of markets in January will, by definition, influence the total return

I’ve recently been experimenting with Genotick, which is open-source java software that attempts to discover mechanical trading systems through the use of machine learning. You can run it on just about any Mac/Windows/Linux system (although you may have additional hurdles to get java8 working at

J.B. Heaton, Nick Polson and J.H. Witte recently authored a nice short paper—it’s all of four pages—entitled “Why Indexing Works.” In it, the authors developed a simple stock selection model to explain why active equity fund managers tend to underperform their benchmark index. While most

In this episode we’re discussing the results of a quantitative study on stop losses completed by Cesar Alvarez of Alvarez Quant Trading. Cesar was also a guest of the show way back in Episode 3. Cesar was director of research for Connors Research for almost 9 years, developing quantitative trading

The best quant mashup links for the week ending Saturday, 12/26 as voted by our readers. Build Better Strategies! Part 2: Model-Based Systems [Financial Hacker] Returns don’t mean revert, fundamentals do [Flirting with Models] Testing for mean reversion with Python & developing simple VIX

Measuring Tail Risks at High Frequency

Pairwise Correlations

Trading systems come in two flavors: model-based and data-mining. This article deals with model based strategies. The algorithms are often astoundingly simple, but properly developing them has its difficulties and pitfalls (otherwise anyone would be doing it). Even a significant market inefficiency

VBA and Quant finance This article is actually a first part of an introductory course to VBA coding, given at Solvay School of Economics in Feb. 2014. The Excel sheet and VBA swap pricing code are attached. Visual Basic for Applications (VBA) is not ” trendy”, properly speaking, in the financial

When a prophet speaketh, … if the thing follow not, nor come to pass, … the prophet hath spoken it presumptuously: thou shalt not be afraid of him.” [Deuteronomy 18:22]. In a December 2014 Math Investor blog, we assessed how 2014 market prophets had fared (answer: not very well). Thus with the

Does the New Year’s Day holiday, a time of replanning and income tax positioning, systematically affect investors in a way that translates into U.S. stock market returns? To investigate, we analyze the historical behavior of the S&P 500 Index during the five trading days before and the five

As per request, I’m including the AmiBroker code for the “30% up/down last quarter in the Russell 3000 index” indicator. I REALLY need to come up with a better name for it than that. How about the Haines Breadth Indicator? No, that’s stupid. Magic Matt’s Mystical Meter? Uh…sure. It’s a

This week I had the great pleasure of speaking with Dr Ernest Chan, from Toronto (Canada). While many traders in the quantitative arena will already be familiar with Ernie, here's a brief intro… You could say, Ernie had somewhat of an unconventional introduction to trading - he started out on

I've been posting and updating the "Twas 3 Nights Before Christmas" study on the blog here since 2008. The study kicked in at the close yesterday close. This year I will again show the Nasdaq version of the study. While all the major indices have performed well during this period, the

Value, Size, Momentum and the Average Correlation of Stock Returns

The Factor Structure of Time-Varying Discount Rates

Option-Based Estimation of the Price of Co-Skewness and Co-Kurtosis Risk

Let’s wrap this up! We established a baseline using a moving-average system on the price of SPY to determine when we enter and exit the market. Then we tested a variety of breadth indicators, using the diffusion calculation and requiring entries and exits to have ten days above or below the

Many investors today are confronting what could be considered a “perfect storm” that is creating strong head winds against the pursuit of higher expected returns. So far, we have discussed the main factors currently working against investors, as well as some steps they might consider taking to

This is the fifth article in a series looking at the backtest results of selling at-the-money (ATM) options straddles on the Russell 2000 index (RUT). For background on the setup for the backtests, as well as the nomenclature used in the tables below, please see the introductory article for this

The rise of smart beta–or more broadly, factor investing–has coincided with a 6 year period of zero interest rates. During this period, factors have been particularly ineffective relative to longer term results. Using publicly-available data (Ken French) we can explore the recent results for the

Through a combination of quackery, charlatanism, and inadequate utilisation of mathematics, callers for US recession in 2016 are embarrassing themselves. Again. The most prominent reason for recession calling may well be the Institute of Supply Management’s Manufacturing Purchasing Manager Index.

How do you rate an NBA team across a decade of play? One method is “Elo,” a simple measure of strength calculated by game-by-game results (Source: Nate Silver’s FiveThirtyEight). A description of Elo is below: Elo ratings have a simple formula; the only inputs are the final score of each game,

This is part 5 of a multi-part series examining the use of market breadth indicators to judge the state of the market. For an overview of what I’m doing, you’d best start here so you can catch up: PART 1…CLICK HERE. And oh yeah, we finally have an indicator that beats our baseline! Just

While prior 5-year returns for the S&P 500 have been spectacular, prior 10-year returns are still muted. Does this mean the bull market still has room to run? Prior returns, however, are not a great predictor of future returns. Fundamentals, not returns, tend to be mean-reverting. Current

Some time during the 18th century the biologist and geologist Louis Agassiz said: “Every great scientific truth goes through three stages. First, people say it conflicts with the Bible. Next they say it has been discovered before. Lastly they say they always believed it”. Nowadays I am not sure

The best quant mashup links for the two weeks ending Saturday, 12/19 as voted by our readers: Using the LASSO to Forecast Returns [Alex Chinco] pysystemtrade [Investment Idiocy] Why Does Dual Momentum Outperform? [Dual Momentum] Why doesn’t the choice of performance measure matter?

Welcome to Part 4 of this series. We’re still trying to find a market breadth indicator that gives a better health assessment than using a simple moving average on SPY. For a description of what the heck I’m doing, please go back and read the first post (and the subsequent ones too): Using

If you had invested $100,000 in Altria Group ($MO) on March 31st, 1980, the position today, with dividends reinvested, would be worth $93.6MM–a 21.0% annualized return. If you had invested the same amount in Berkshire Hathaway ($BRK-A), the position would be worth $77.0MM–a 20.4% annualized