Quant Mashup Diversification for Trend Following Models [Algorithmic Advantage]In the realm of trend following, one prevailing assumption is that highly correlated assets should not be traded together, as they are unlikely to provide diverse opportunities. However, this article will challenge this notion by delving into the nuances of trade correlations versus price(...) A portfolio of strategies [Quantitativo]“Don't look for the needle in the haystack. Just buy the haystack.” Jack Bogle. Harry Markowitz's Modern Portfolio Theory (MPT) revolutionized the field of investment management by providing a quantitative framework for portfolio construction and diversification. He is considered the(...) The Lifting Power of Outliers [Algorithmic Advantage]In previous posts, we’ve explored how massive diversification serves as a crucial tool for outlier hunters—not only to provide correlation benefits in chaotic regimes but also to increase our chances of capturing rare market events. It’s the frequency of these outliers in our trade(...) Extracting Structured Datasets for Systematic Strategies from Unstructured Textual Sources [Quant Rocket]Natural Language Processing (NLP) is a broad field that enables computers to process and analyze unstructured textual data. In this article, we present several proprietary Brain datasets derived from news articles, SEC regulatory filings, and earnings calls, along with case studies implemented in(...) Low-priced stocks: do they impair performance? [Alpha Architect]It is well documented in the literature that retail investors have an irrational preference (from a traditional finance perspective) for investing in high-volatility stocks which have lottery-like distributions—those that exhibit positive skewness and excess kurtosis (fat tails). Studies, such as(...) Capital Market Assumptions: Combining Forecasts for Improved Accuracy [Portfolio Optimizer]Capital market assumptions1 (CMAs) are forecasts of future risk/return characteristics for broad asset classes over the next 5 to 20 years produced by leading investment managers, consultants and advisors2. These forecasts are well-reasoned, analytically rigorous assumptions about uncertain future(...) Unified Approach for Hedging Impermanent Loss of Liquidity Provision [Artur Sepp]Let me introduce our research paper co-authored with Alexander Lipton and Vladimir Lucic for hedging of impermanent loss of liquidity provision (LP) staked at Decentralised Exchanges (DEXes) which employ Uniswap V2 and V3 protocols. Uniswap V3 protocol allows liquidity providers to concentrate(...) Multi-Strategy Hedge Funds & Replication ETFs [Finominal]Despite stellar returns of some multi-strategy hedge funds, the category has not gained market share Multi-strategy hedge funds are highly correlated to equities, offering limited diversification benefits Replication ETFs offer the same unfavorable characteristics INTRODUCTION In 2022 multi-strategy(...) Portfolio Optimization with PyBroker [Ed West]Portfolio optimization is a method for allocating assets in a portfolio in order to meet specific objectives. For example, it can be used to construct a portfolio of assets with the objective of minimizing risk while also maximizing returns. Portfolio optimization can be a useful technique for(...) Momentum-based Long & Short Equities Portfolio [Quant Trading Rules]“I can calculate the motion of heavenly bodies but not the madness of people.” Isaac Newton Sir Isaac Newton, one of the greatest scientists of all time, was also an investor. Newton reportedly invested in the South Sea Company, a British joint-stock company, and initially made substantial(...) Robustness of the 2.11 Sharpe Mean Reversion Strategy [Quant Trading Rules]“As for me, all I know is that I know nothing.” Socrates. I love this quote. Humility is such an important virtue, especially in trading. If someone already knows something, their curiosity is gone. Their desire to learn is weak or non-existent. After I published the first article, some people(...) Macroeconomic announcements: how do they impact spending? [Alpha Architect]This paper explores several key aspects related to household consumption behavior during the Great Financial Crisis of 2008-2009, with a focus on the impact of salient adverse macroeconomic announcements. Spending Less After (Seemingly) Bad News Garmaise, Levi and Lustig Journal of Finance, 2024 A(...) A Few Thoughts on Pragmatic Asset Allocation [Quantpedia]One of the main reasons why the Pragmatic Asset Allocation Model was designed is to give investors a tax-efficient possibility to invest in a global equity portfolio with a lower risk than the passive buy&hold approach. Therefore, the PAA model is not the “absolute return” model but rather(...) U.S. Companies Have Outperformed Japanese Companies, or Have They? [Alpha Architect]Over the period January 2000-March 2024, the S&P 500 Index returned 7.4% per annum, outperforming the return of 2.2% per annum of Japanese large stocks (MSCI/Nomura data) by 5.2 percentage points per annum. The outperformance has been even greater since 2010, with the S&P 500 Index returning(...) Rolling regime [OSM]Our last post finished up examining the three different methods used to predict market regimes in the Gold Miners ETF, GDX – namely, clustering, Gaussian Mixture Methods (GMMs), and Hidden Markov Models (HMMs). We found GMMs performed the best in terms of proof-of-concept. But there was a lot of(...) Volatility Forecasting: HAR Model [Portfolio Optimizer]Among the different members of the family of volatility forecasting models by weighted moving average1 like the simple and the exponentially weighted moving average models or the GARCH(1,1) model, the Heterogeneous AutoRegressive (HAR) model introduced by Corsi2 has become the workhorse of the(...) The Art of Financial Illusion: How to Use Martingale Betting Systems to Fool People [Quantpedia]The Internet (and especially the part related to finance, trading, and cryptocurrencies) can be dangerous and full of offers of guaranteed returns, pictures of forever-growing bank accounts, and guys with golden rings swimming in the bathtub filled with cash. The truth is usually less rosy.(...) Rebalancing: can trading costs and market frictions be mitigated? [Alpha Architect]The focus of this paper is to test an effective rebalancing method that prioritizes trades with the strongest signals to capture more of the factor premium while reducing turnover and trading costs. The authors coined the term “smart rebalancing” which involves prioritizing trades based on the(...) Hidden Dangers of Writing an OMS [Mark Best]Writing an OMS for an HFT platform is a really difficult task that is often taken for granted. It is made more difficult in crypto because the exchange infrastructure is unreliable. It is not uncommon to simply be told “go away and come back later” when trying to call api functions. There is(...) Investigation of Lead-Lag Effect in Easily-Mistyped Tickers [Quantpedia]Our new study aims to investigate the lead-lag effect between prominent, widely recognized stocks and smaller, less-known stocks with similar ticker symbols (for example, TSLA / TLSA), a phenomenon that has received limited attention in financial literature. The motivation behind this exploration(...) Short Positions - do investors underreact due to illiquidity? [Alpha Architect]The important role played by short sellers, who, through their actions, keep prices efficient by preventing overpricing and the formation of price bubbles in financial markets, has received increasing academic attention in recent years. Research into the information contained in short-selling(...) 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(...) Downloading Dukascopy Tick Data with Node Library [Dekalog Blog]As part of my investigations into forex news trading I have found it necessary to obtain forex tick level data for back testing purposes and below I provide code to achieve this using Dukascopy's Node library, being called from Octave and using some system calls. A useful youtube video about(...) How to Track Retail Investor Activity in TAQ [Alpha Architect]This paper explores the effectiveness of the BJZZ algorithm, developed by Boehmer, Jones, Zhang, and Zhang (2021), in identifying and signing retail trades executed off exchanges with subpenny price improvements. A (Sub)penny For Your Thoughts: Tracking Retail Investor Activity in TAQ Barber, Huang,(...) Diversifying via Time Zones [Finominal]Funds providing the same exposures trade similarly, regardless of where they trade On paper, investors can achieve benefits by diversifying via time zones In reality, this represents a form of volatility laundering like private equity INTRODUCTION On the 24th of January 2023, Hindenburg Research, an(...) Private Equity May Not Be the Diversifier We Think (Due to Volatility Laundering), But Private Credit Could Be [Alpha Architect]Volatility laundering causes the risk-adjusted returns and the diversification benefits of private equity to be significantly overstated. However, the problem of volatility laundering is not a problem for all private investments, specifically not for high-quality, floating rate, private credit.(...) Quantpedia Composite Seasonality in MesoSim [Quantpedia]The Efficient Market Hypothesis (EMH), theory developed in the 1960s, states that stock prices reflect all available information, making it impossible to consistently earn above-average returns using this information. Nevertheless, numerous studies challenge this view by documenting anomalies that(...) Sell in August and Go Away [Alvarez Quant Trading]I was going through some old issues of Technical Analysis of Stocks & Commodities looking for some ideas to test. In the November 2019 issue, I came across “Stock Market Seasonality: A Global Phenomenon” by Jay Kaeppel. The basic idea was that global markets share the same “buy in November(...) Complexity is a virtue in return prediction [Alpha Architect]Finance has seen unprecedented growth in the use of artificial intelligence, specifically in machine learning models. Applications have included portfolio construction, stock analysis and in this case, the prediction of stock market returns. This paper discusses the benefits of using complex models(...) Bonds versus CTAs for Diversification [Finominal]Although yields are higher, bonds have also become riskier Bonds and CTAs have generated similar diversification benefits since 1999 Applying a trend following overlay for equities was accretive in Europe and Japan INTRODUCTION In May 2021 we made the case that bonds have become less useful in asset(...) Combating Volatility Laundering: Unsmoothing Artificially Smoothed Returns [Portfolio Optimizer]It is common knowledge that returns to hedge funds and other alternative investments [like private equity or real estate] are often highly serially correlated1. This results in apparently smooth returns that have artificially lower volatilities and covariations with other asset classes2, which in(...) Active vs. Passive Life Cycle Savings Strategies [Quantpedia]The main goal of our new article is to explore the efficacy of passive versus active management strategies in the context of savings for long-term financial goals. By analyzing the performance of nine distinct asset classes, including Double Leveraged ETFs and an implementation of the Pragmatic(...) Measuring Performance Chasing [Finominal]Performance chasing can be measured via extreme excess returns Abnormal negative returns lead to subsequent outperformance While abnormal positive returns lead to subsequent underperformance INTRODUCTION Morningstar recently published a list highlighting the top 10 fund management companies that(...) Is Month-End Still the Best Time to Trade Tactical Strategies? [Allocate Smartly]Most Tactical Asset Allocation (TAA) strategies trade just once per month. Strategy developers almost always assume trades are executed on the last trading day of the month. A unique feature of our platform is the ability to follow these strategies on any other day of the month as well. We’re not(...) Revisiting Overnight vs Intraday Equity Returns [Robot Wealth]Back in May 2020, in the eye of the Covid storm, we looked at overnight vs intraday returns in US equities. Intuitively, we’d probably expect to see higher average returns overnight when the market is closed – because it’s much more difficult to hedge and manage our exposures when the cash(...) Talking VIX Trading and my NAAIM whitepaper with @BetterSysTrade [Quantifiable Edges]I had the pleasure of joining Andrew Swanscott on the Better System Trader podcast on Wednesday afternoon. We had a detailed discussion about VIX trading and my recent whitepaper that won the NAAIM Founders Award. It had been a long time since I was last on Andrew’s podcast, but he is always a fun(...) Quality, Factor Momentum, and the Cross-Section of Returns [Alpha Architect]Of the hundreds of equity factors identified in the financial literature, there were only five that met the criteria Andrew Berkin and I established in our book Your Complete Guide to Factor-Based Investing. To be considered for investment, a factor must have provided a premium that was persistent(...) Hidden miners [OSM]We conclude our discussion of market regime detection by examining Hidden Markov Models (HMMs). Recall this series was inspired by a post from PyQuant News that highlighted a longer article from the London Stock Exchange Group (LSEG). Those who took the CFA exams probably forgot using HMMs in the(...) New Volatility Based Trading Techniques with Rob Hanna (@QuantifiablEdgs) [Better System Trader]Could traders be using the VIX wrong? Is there an even better way to time the markets and reduce risk? In this episode, discover the new secrets of volatility-based trading with Rob Hanna. Rob shares his award-winning insights into using the VIX and SPX to time the market, challenging conventional(...) Crypto Perpetual Contract Pair Trading [Quant Insti]Statistical arbitrage is a classic quantitative trading strategy, and pairs trading is one of them. Digital currency perpetual contracts are non-delivery perpetual futures. This project describes using data from the Binance exchange to find perpetual contract pairs whose pairing spreads conform to(...) Unlock the Secrets of Seasonal Trading [Milton FMR]Seasonal trading strategies are grounded in the belief that certain patterns repeat over specific periods due to predictable events and behaviors. These strategies can be a powerful tool for traders, helping them to capitalize on regular market trends. This article will delve deeper into the world(...) Quantpedia Awards 2024 - Winners Announcement [Quantpedia]Hello all, Welcome to the Quantpedia Awards 2024 winners announcement. This is the moment we all have been waiting for, and today, we would like to acknowledge the accomplishments of the researchers behind innovative studies in quantitative trading. So, what do the top five look like, and what will(...) Carry versus Trend Following [Finominal]The carry strategy has become more attractive given higher yields However, the strategy is highly correlated to equities in periods of market stress CTAs are better diversifiers INTRODUCTION Carry strategies were widely popular before the global financial crisis in 2009, but less thereafter given a(...) Using Oanda's API to Place Entry Orders [Dekalog Blog]Since my last post about end of initial testing I have been working on Oanda API functions in Octave to programmatically place entry orders and associated take profit and stop orders for a future possible forex news trading system. The reason for this is simple - it would be next to impossible to(...) Momentum Top N with Docker, Jupyter and QSTrader [Quant Start]In the previous tutorial we set up a backtesting environment using the QSTrader backtesting framework inside a Jupyter Notebook. We isolated this research environment and its dependencies using Docker, with Docker Compose. In this article we will show you how to implement one of the example(...) Momentum Everywhere, Even Cross-Country Factor Momentum [Alpha Architect]Among the many factors cited in academic research, only a handful have been sufficiently reliable for use in asset pricing models. One of those is momentum. The evidence has been robust for not only cross-sectional (relative) and time-series (absolute or trend) momentum, but also for factor(...) Gaussian gold [OSM]Our previous post, used hierarchical clustering to identify market regimes in the gold miners ETF, GDX. This was inspired by a post from PyQuant News that highlighted a longer article from the London Stock Exchange Group (LSEG). In this post, we’ll continue looking at identifying market regimes(...) How to easily improve your Sharpe ratio (in no time) [PyQuant News]Systematic risk affects the entire market and impacts the Sharpe ratio. Any trading strategy must consider the impact of systematic risk. While a strategy must involve some risk to make money, systematic risk cannot be diversified away. So, we need to build a hedge to get rid of it. By hedging(...) Skewness of Funds - Friend or Foe? [Finominal]Some funds exhibit strong skewness profiles Skewness is highly time-varying and not necessarily a negative criteria Should be measured but unlikely managed INTRODUCTION The trouble with investing in emerging markets is that they are quite different, which requires extensive due diligence on each of(...) Tactical Asset Allocation and Taxes: FIFO vs LIFO Deep Dive [Allocate Smartly]This is a deep dive into which share disposal method – FIFO or LIFO – would have been more tax advantageous for the 80+ asset allocation strategies we track. When selling shares FIFO (first in, first out), the oldest shares held are sold first. When selling LIFO (last in, first out), the most(...)