Low Risk Anomalies?

In Search of Alpha - Trading on Limited Investor Attention

Average Skewness Matters!

Ninety Years of Media Coverage and the Cross-Section of Stock Returns

Dash for Cash: Month-End Liquidity Needs and the Predictability of Stock Returns

The best quant mashup links for the week ending Saturday, 12/05 as voted by our readers: Predicting volatility [EP Chan] Announcing the QuantStart Advanced Trading Infrastructure Article Series [Quant Start] Exploring mean reversion and cointegration with Zorro and R: part 1 [Robot Wealth] The

This part is awesome. Trust me! Previously, in Part 1, we examined two independent methods in order to estimate the probability of a very rare event (heavy or extreme loss) that an asset could experience on the next day. The first one was based on the computation of the tail probability, i.e.: given

1. Motivating Example A Popular Goal. Financial economists have been looking for variables that predict stock returns for as long as there have been financial economists. For some recent examples, think about Jegadeesh and Titman (1993), which shows that a stock’s current returns are predicted by

This is how your average buy-and-hold investor probably feels right now if they are looking to deploy new capital for the long run. Today, bond yields are puny while stock valuations are rich. In fact, we currently have one of the worst yield and value combinations in history as seen in the charts

Summary Traditionally, stocks have been used for growth and bonds for safety Therefore, investors looking for long-term capital appreciation tended to allocate heavily towards stocks while investors concerned about preservation allocate more heavily towards bonds With an anemic forecast for equity

This post will outline a first failed attempt at applying the ensemble filter methodology to try and come up with a weighting process on SPY that should theoretically be a gradual process to shift from conviction between a bull market, a bear market, and anywhere in between. This is a follow-up post

Most of what I’ve written about have been equity factors. But factors, persistent price predictors, apply to other investments as well. FactorWave will also offer analyses in volatility, equity options and commodity futures. Volatility Equity volatility (tradeable through the VIX) displays two

Liquidity is valuable to investors. Therefore, investors demand higher expected returns for less liquid stocks. The liquidity of an asset market refers to the ability of investors to buy and sell significant quantities of that asset, quickly, at low cost and without a major price concession. Thus,

First draft of 'JavaScript for Financial Analysts' Chapter 11. ~ Finance is a super slow mo movie of investment decision logic colliding into chaotic markets. The narrow space in between is inhabited by statistics. JavaScript has a capable statistics library called jStat which offers a

Wouter, Butler and Kipnis [2015] recently demonstrated Classical Asset Allocation (CAA) for long only portfolios, based on Markowitz’ concepts. The method uses only two parameters thus minimizing the chances of curve-fitting and data snooping. The parameters are lookback period (12 months) and

Last month’s results for trend following were positive, with a strong performance that took the index back into positive territory for the year. The strategy goes into the last month of the year holding modest gains but 2015 will obviously not be a repeat of the runaway performance from last year.

This series of posts is inspired by several chapters from Ernie Chan’s highly recommended book Algorithmic Trading. The book follows Ernie’s first contribution, Quantitative Trading, and focuses on testing and implementing a number of strategies that exploit measurable market inefficiencies.

A few weeks ago, we discussed a method that we implemented to construct more realistic indices using an estimate of time weighted average prices (TWAP) for trade execution. Prior to October, whenever our models required a rebalance, we assumed that it occurred at the opening price on the following

Linear regression slope is another tool one can use to sidestep potentially sticky situations. The following algorithms hold a full position in SPY but liquidate whenever the slope of closing prices turn negative. Starting Capital of $100,000 and backtest period from 2/2003 and 11/2015. Strategy End

Perhaps it is the different jargon used in different disciplines, not sure. But for some reason, the terms ‘predictions’, ‘forecasts’ and ‘projections’ are frequently used interchangeably. There should be at least some distinction, here is what I entertain: The word ‘predictions’

November 2015 Trend Following: UP +6.06% / YTD: +9.86% The Wisdom trend following index gradually made its way up last month to post a strong result for November, and recover a large part of the losses occurred in October. This helped cement the YTD number further in the black. Now nearly in

There has been a lot of research recently that investigates the link between stock returns and higher moments of the return distribution, specifically the skewness of returns. This link, unfortunately, is frequently ignored by more standard measures of market risk and volatility. Skewness, if

One of the most underestimated feature of the financial asset distributions is their kurtosis. A rough approximation of the asset return distribution by the Normal distribution becomes often an evident exaggeration or misinterpretations of the facts. And we know that. The problem arises if we

While the underperformance of high yield bonds since my post The Case Against High Yield has certainly made high yield bonds more attractive (yields went from sub 6% to north of 8%), I still prefer the risk/return profile of a stock/bond allocation (more here). For those that are looking for a

Our Quantitative Momentum (QM) system seeks to identify stocks with the highest quality “momentum.” We consider the term momentum to mean a continuation of past returns—past winners tend to be future winners, while past losers tend to be future losers. How can we exploit this phenomenon? At

I’ve recently written a few posts about the persistency of cross-sectional momentum. But it seems that eventually stocks that go up have to come down. Not only is this somewhat intuitive, but the existence of stock price reversals is also well documented. But actually momentum persistence and

Everybody knows about the Central Limit Theorem, but have you ever seen a visual demonstration? The central limit theorem states that, given certain conditions, the mean of a large number of iterates of independent random variables, will be approximately normally distributed, regardless of the

To date on QuantStart we have considered two major quantitative backtesting and live trading engines. The first arised from the Event-Drive Backtesting series I wrote back in March 2014. The second is QSForex, an open-source backtest and live trading engine that hooks into the OANDA Forex Broker

With Januaries (a month in which lagged "losers" typically outperform lagged "winners") excluded, the average monthly return to a momentum strategy for U.S. stocks was found to be 59 bps for non-quarter-ending months but 310 bps for quarter-ending months. The pattern was stronger

Jeff Swanson's Trading System Success web site is often worth a visit for those looking for new trading ideas. A recent post Seasonality S&P Market Session caught my eye, having investigated several ideas for overnight trading in the E-minis. Seasonal effects are of course widely recognized

As a financial analyst or algo trader, you are so often faced with information on, inter alia, daily asset trading in a form of a daily returns matrix. In many cases, it is easier to operate with the return-series rather than with price-series. And there are excellent reasons standing behind such

It is important to know the difference between high frequency and low frequency trading before discussing the specific trading strategies. Opinions tend to differ on what constitutes high frequency but by and large there is a consensus that the duration of asset holding period is very low, ranging

Ever since the global financial crisis, the real interest rates of developed economies have remained in negative territory. Nominal interest rates hover near zero, and inflation rates, although quite low for historical standards, have remained positive (in most countries, at least on average).

First draft of 'JavaScript for Financial Analysts' Chapter 10. ~ D3 is a foreboding beast. It eschews classic programming styles in favour of a more functional approach. Luckily however, if you have come this far, get ready to sit back and enjoy of the fruits of your labour. Almost every

OK, I will admit I am a bit late with this one. I’ll go ahead and blame “The Holidays”. Anyway, if you were wondering when it might be a good time to hold real estate stocks, the answer might well be, um, “Now”. (Jay Kaeppel Interview at BetterSystemTrader.com) Favorable Seasonal Period

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

The best quant mashup links for the week ending Saturday, 11/28 as voted by our readers: Frog in the Pan: Identifying the Highest Quality Momentum Stocks [Alpha Architect] Better Tests with Oversampling [Financial Hacker] Bring More Data [Dual Momentum] A framework for rapid and robust system

Andrew Gibbs has been involved in the financial markets since 2001 and is the founder and CEO of Halifax New Zealand. Andrew has extensive experience in all forms of equity and derivative contracts, managing millions of dollars and trading a number of markets around the world. In this episode we

Stop-loss strategies are commonly used by investors to reduce their holdings in risky assets if prices or total wealth breach certain pre-specified thresholds. We derive closed-form expressions for the impact of stop-loss strategies on asset returns that are serially correlated, regime switching,

We contrast the time-series and cross-sectional performance of three popular investment strategies: carry, momentum and value. While considerable research has examined the performance of these strategies in either a directional or cross-asset settings, we offer some insights on the market conditions

We show that the standard equation-by-equation OLS used in performance evaluation ignores information in the alpha population and leads to severely biased estimates for the alpha population. We propose a new framework that treats fund alphas as random effects. Our framework allows us to make

Predicting volatility is a very old topic. Every finance student has been taught to use the GARCH model for that. But like most things we learned in school, we don't necessarily expect them to be useful in practice, or to work well out-of-sample. (When was the last time you need to use calculus

Somewhat related to the idea of acceleration that I have been writing about recently, is the concept of persistent momentum. That is, do stocks that have performed well over several periods, beat those that have done well for only one period? This idea was tested by Hong-Yi Chen, Pin-Huang Chou and

The PCA Model in the FX Market: Economic Factors and Volatility Modelling

Risk-based asset pricing theory suggests, simply, that assets bearing a higher risk should compensate investors with higher returns. While most papers investigating the risk-return relationship of assets are focused on equity markets, surprisingly few studies explore this phenomenon in currency

Several studies have attributed the high excess returns of the momentum strategy in the equity market to investor behavioral biases. However, whether momentum effects occur because of investor underreaction or because of investor overreaction remains a question. Using a simple model to illustrate

First draft of 'JavaScript for Financial Analysts' Chapter 9. ~ The web dominates our communication. The driver of this crushing victory? The humble webpage increasingly coupled with JavaScript. Up until now we have focused on the basics of how to code JavaScript in a functional manner,

Momentum has received a lot of attention in the asset-pricing literature over the past several decades, and for good reason. Trending behavior is a staple in markets. In contrast with other pricing “anomalies”, short-term return persistence—positive and negative—is a robust factor across

This is the first article in a series where we will look at the backtest results of selling at-the-money (ATM) options straddles on the Russell 2000 index (RUT). In the prior series, we looked at the performance of this same strategy on the SPX. For background on the setup for the backtests, as well

Important preface: This post is in no way intended to showcase a particular trading strategy. It is purely to share and demonstrate the use of the framework I’ve put together to speed the research and development process for a particular type of trading strategy. Comments and critiques regarding