The first quarter of 2020 has been one of the most challenging times in the post World War II era. The crash in oil prices due to geopolitical reasons and the COVID-19 global pandemic were the dominant themes. Financial markets act as bellwethers and give us a reflection of the overall sentiment for

Recent actions in WTI Futures pricing on Apr 20, 2020 caused my curiosity to have a deep look at intraday crude oil price time-series. With no surprise, I couldn’t find any free and effortlessly available dataset on the Internet. This is a common problem for lots of quants and data analysts:

How long will the recession last? How deep will it be? What are the long-term implications for the economy, markets, and society? The global pandemic has ushered in a period of extreme uncertainty and investors are left with too many unanswered questions and afraid for their portfolios. Where do we

Has the market sell-off and subsequent bounce treated all stocks the same? A good portion of the bull market move from 2009 to 2019 has been led by the big-cap stocks. Did they hold up better during the March sell-off? What about with the bounce? Did the smaller-cap stocks have a bigger bounce? The

The Black-Scholes formula can be used to create a hedge for an option. However, this model is derived in continuous time. What happens when we use it to hedge an option in discrete-time? European options are financial securities which give their holder the right (but not the obligation) to buy or

We’ll be talking about Paul Novell’s flagship SPY-COMP strategy on the blog tomorrow. The strategy uses monthly economic data, like the kind available from the FRED database. We’ve covered a handful of strategies like this in the past (think Philosophical Economics’ Growth Trend-Timing).

In the short video below, I show how to compute Active Share. The accompanying excel file with the formulas can be found here. I start by computing the active share for two hypothetical funds, and then examine the active share of a few live ETFs.

I am not a fan of most equity factors, but if any equity factor exists, it is the value factor. Graham and Dodd, Warren Buffet, Fama and French have all highlighted value as an investment strategy. Its essence is the ratio of a backward-looking accounting value vs. a forward-looking discounting of

For the past decade, asset managers have been educating clients about factor investing as it became the new norm. And yet after all these years, portfolios are still composed of one factor: Equity Beta. Among many questionable assertions and assumptions behind factor investing (our thoughts here,

To describe the impact of social distancing, a theory of communication is developed and described comprehensively in this article. The focus is on the relative importance of worker interactions, the cost of those interactions and their impact on the size of wage subsidies intended as compensation

Factor investing in fixed income has been heralded as the next frontier in asset management Smart beta fixed income ETFs in the US manage only slightly more than $2 billion of assets Defensive strategies reduced drawdowns during the ongoing coronavirus crisis INTRODUCTION Investing is becoming more

Since 2009, any decision to de-risk in a trend equity portfolio has largely been the wrong decision. At the time of writing, we implement a 1-month tranching process in most of our trend mandates, which has the effect of dollar-cost averaging signal changes over a 1-month period. We adopted this

Concept: Dual momentum trading strategy based on Rate of Change (ROC). Research Goal: Performance verification of dual momentum signals. Specification: Table 1. Results: Figure 1-2. Trade Filter: Long Filter: Slow Rate of Change (ROC1) is above zero. Short Filter: Slow Rate of Change (ROC1) is below

Optimisation tools have a knack for seducing systematic traders. And what’s not to love? Find me the unique set of parameters that delivered the greatest return in my ten-year backtest. And do it in under five seconds. That’s certainly attractive. But do you want to hear something controversial?

This months project is a new indicator by John Ehlers, first published in the S&C May 2020 issue. Ehlers had a unique idea for early detecting trend in a price curve. No smoothing, no moving average, but something entirely different. Let’s see if this new indicator can rule them all. The basic

Building on the concepts presented in my Dividends Are Different article, here we present data and observations highlighting the relationship between inflation and 1) company fundamentals, 2) dividends, and 3) stock market movements. 1 We look at empirical data to investigate how inflation relates

Are you doing independent factor research? Have you spent countless hours on Ken French’s website? Do you run factor regressions for “fun”? Congrats — you are officially a finance geek and you will probably benefit from our new factor investing library. Our library has over 300 factors to

Tick data is the most granular high-frequency data available, and so is the most useful in market microstructure analysis. Unfortunately, tick data is also the most susceptible to data corruption and so must be cleaned and conditioned prior to being used for any type of analysis. This article,

Tactical Asset Allocation (TAA) weathered the storm in February and March, significantly paring down losses vs conventional buy & hold. So far it has trailed the bounce in April, but these are early days. We track 50+ TAA strategies sourced from books, papers, etc., allowing us to draw some

One of the keys to running a successful systematic trading business is a relentless focus on high return-on-investment activities. High ROI activities include: Implementing new trading strategies within a proven framework. An example might be to implement a portfolio of pairs trades in the equity

It has been well documented both that stock returns have much fatter tails than a normal distribution would generate, and that tail events occur much more frequently than a normal curve would predict. 1 For example, Benoit Mandelbroit and Richard Hudson examined the daily index movements of the Dow

After our little detour into GARCHery, we’re back to discuss capital market expectations. In Mean expectations, we examined using the historical average return to set return expectations when constructing a portfolio. We noted hurdles to this approach due to factors like non-normal distributions,

My last two posts have shown Octave functions that use the Oanda API to access and download data. In the first of these posts I said that I would post more code for further functions as and when I write them. However, on further reflection this would be unnecessary as the generic form of any such

Many machine learning algorithms rely on distances between data points as their input, sometimes the only input, especially so for clustering and ranking algorithms. The celebrated k-nearest neighbors (KNN) algorithm is our example chief, but distances are also frequently used as an input in the

In a previous post, we showed that unhedged currency exposure adds unrewarded risk to our investment, hurting risk-adjusted-performance. This risk should either be neutralized through passive hedging; or mitigated and turned into profit with an active overlay, the latter being what ETS has been

Developer: Etienne Botes and Douglas Siepman (Vortex Indicator). Concept: Dual momentum trading strategy based on Vortex Indicator. Research Goal: Performance verification of dual momentum signals. Specification: Table 1. Results: Figure 1-2. Trade Filter: Long Filter: Slow Positive Vortex Indicator

A differentiation of the time-series is a common transformation used when we want to get a stationary time-series given a non-stationary one. The latter usually displays time-dependent relationships like trends, seasonality, quasi-cyclic patterns, and their Fourier power spectrum is characterised by

Time for the annual review post, as my reviews follow the UK tax year which ended on the 5th April. And what a year it has been; well 10 months or so of fairly normal stuff, followed by several weeks of stomach churning market chaos. Previous updates can be found here, here, here, here and here.

Trend Following, as an investing strategy has delivered strong performance during market chaos (e.g., Global Financial Crisis of 2007–2009), but the strategy has gone through a significant drawdown (save the last few months where things are perking up!). We have seen dismal returns in the recent

Low Vol-Momentum & Value-Momentum portfolios outperformed stock markets since 1989 Low factor correlations contributed to the attractive risk-return profiles Excess returns have been lower in the most recent than in previous decades INTRODUCTION If an investor would state today that in ten or

Macroeconomic trends are powerful asset return factors because they affect risk aversion and risk-neutral valuations of securities at the same time. The influence of macroeconomics appears to be strongest over longer horizons. A macro trend indicator can be defined as an updatable time series that

In this video snippet, Freeman Dyson talks about an experience he had with Enrico Fermi in 1951. Dyson was originally a mathematician who had just shown how two different formulations of quantum electrodynamics (QED), Feynman diagrams and Schwinger-Tomonoga's operator method, were equivalent.

In many academic fields like physics, chemistry or natural sciences in general, laws do not change. While economics and theory of investing try to find rules that would be true and always applicable, it is not that simple, there is a “complication“ – human. Psychology of humans is very

In one way or another, most quantitative models somehow seek to find and exploit relationships between two or more series of returns. Therefore, the usual pipeline has a time-series go through mathematical procedures which condensate in a couple of figures meaningful information: the expected mean,

Trend-following strategies are a lot like stock-picking strategies — there are endless approaches and varying levels of complexity. In this short piece, we explore the decision related to implementing basic trend-following strategies on either a daily or a monthly basis. Many traders intuitively

Given the recent market decline, we thought it would be helpful to review some of our blog posts from the past that may be relevant to the current crisis atmosphere. These posts focus on research that explores investment strategies that are believed to help investors manage risk and diversify their

We present the performance of five well-known factors on an annual basis for the last 10 years. We only present factors where academic research highlights positive excess returns across market cycles and asset classes. Other strategies like Growth might be widely-followed investment styles, but lack

There has been considerable speculation as to the shape of the market’s recovery. Practitioners have taken to using letters as short hand for the recovery they forecast. Whether the market makes a fast V-shaped recovery, a slower U-based formation, a W-style double-bottom, or an L-shaped reset is

As part of my on-going code revision I have written my first Octave function to use the Oanda API. This is just a simple "proof of concept" function which downloads an account summary. ## Copyright (C) 2020 dekalog ## ## This program is free software: you can redistribute it and/or modify

In our last post, we discussed using the historical average return as one method for setting capital market expectations prior to constructing a satisfactory portfolio. We glossed over setting expectations for future volatility, mainly because it is such a thorny issue. However, we read an excellent

When I was in the Marines we were “voluntold” to read a lot on the history of warfare. This mandate came from General Mattis’ desire that we lean on the 5,000+ years of fighting experience amongst us illustrious humans. Of course, history never tells you exactly what will happen in the future,

In finance, computation efficiency can be directly converted to trading profits sometimes. Quants are facing the challenges of trading off research efficiency with computation efficiency. Using Python can produce succinct research codes, which improves research efficiency. However, vanilla Python

Statistical learning for macro trading involves model training, model validation and learning method testing. A simple workflow [1] determines form and parameters of trading models, [2] chooses the best of these models based on past out-of-sample performance, and [3] assesses the value of the

It’s time to rethink “passive” stock investing. While capitalization weighted U.S. stock indices have delivered good performance over the past decade and the long-term, many investors don’t realize that they can achieve similar returns with much less risk by employing risk-efficient

In a previous post, I simulated S&P 500 drawdowns for perspective on what the current market correction may dispense in the weeks and months ahead. Let’s supplement that analysis by visually comparing the current and ongoing peak-to-market decline with the ten deepest drawdowns since 1950.

You can’t predict the future unless you have a crystal ball but you can predict an asset’s trading price in next time step if you have a right tool and enough confidence in your model. With the development of a new class of forecasting models employing Deep Learning neural networks, we gained

This is the final post in a series aimed at answering three fundamental questions in trading: How should we control risk (first post) How much risk should we take? (previous post) How fast should we trade? (this post) Understanding these questions will allow you to avoid the two main mistakes made

A large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, demonstrates that while past returns do not predict future returns, past volatility largely predicts future near-term volatility, i.e., volatility is

Tactical Asset Allocation (TAA) weathered the storm in March well, significantly paring down losses versus conventional buy & hold. We track 50+ TAA strategies sourced from books, papers, etc., allowing us to draw some broad conclusions about TAA as a style. In the table below we show the March

We are living through unprecedented times. Due to the ongoing global health pandemic, the international markets have plummeted with speeds never seen before, reminiscent of the 1930s and the Great Depression. On February 19, 2020, the SP500 Index closed at an all-time high price and then proceeded