Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at least for a short period of time. In 1997, Mark Carhart, in his study, “On Persistence in Mutual Fund Performance,” was the first to use momentum,

We show, both theoretically and empirically, that liquidity creation induces negative exposure to volatility risk. Intuitively, liquidity creation involves taking positions that can be exploited by privately informed investors. These investors' ability to predict future price changes makes

As far as Fed Days go, Wednesday was a disappointment. Not only did it fail to rally, but it also left SPX and NDX at 10-day lows. With Fed Days typically bullish, finishing at a 10-day low is quite unusual. The results table below is part of a larger examination I did in last night’s Subscriber

Machine learning (ML) is changing virtually every aspect of our lives. Today ML algorithms accomplish tasks that until recently only expert humans could perform. As it relates to finance, this is the most exciting time to adopt a disruptive technology that will transform how everyone invests for

Two of the most talked-about topics in modern finance are machine learning and quantitative finance. Both of these are addressed in a new book, written by noted financial scholar Marcos Lopez de Prado, entitled Advances in Financial Machine Learning. In this book, Lopez de Prado strikes a well-aimed

We outlined the full set of rules for the Newfound 2018 March Madness Brackets here. We have two rounds in the bag in this year’s March Madness bracket competition, and what a wild ride it’s been: 16 seed UMBC made history by beating 1 seed Virginia, edging them out by a mere 20 points… The

Recently there has been a fairly active discussion within the financial media on the topic of stock buybacks, or share repurchases. This is probably due to the recent tax reform, which has caused many to question where companies will spend their additional profits now that firms (on average) will be

The Fed holds policy meetings 8 times per year. Many times since starting Quantifiable Edges in 2008, I have discussed the (primarily bullish) edge that exists on the final day of these meetings when the Fed releases its statement and announces any new policy changes. One question I often get about

Even when an investment has a positive expected average growth rate, the experience of most individuals may be catastrophic. By focusing on the compound average growth rate, we can see the median realizations – which account for risk – are often more crucial decision points than ensemble

Some ETF investors claim that passive index products are superior to actively managed funds due to lower turnover and therefore less transaction costs. While this is partially true, most investors are unlikely to be familiar that indices such as the S&P 500 have a relatively high amount of

I discussed last weekend that monthly option expiration (opex) week is typically a bullish week, especially during the months of March, April, October, and December. Obviously, the bullish tendency did not play out this past week. So does this mean the bullish tendency may be delayed a week? Or is

Interest rate swaps trade duration risk across developed and emerging markets. Since 2000 fixed rate receivers have posted positive returns in 26 of 27 markets. Returns have been positively correlated across virtually all countries, even though low yield swaps correlated negatively with global

Index investing has grown significantly over the past 30 years. Back in 1990, few were even aware of the option for indexing, and options were limited mostly to a handful of conventional mutual funds tracking the U.S. S&P 500 index. In 1993, Boston’s State Street Global Advisors launched the

When stock prices reach a new high, investors start asking the question: Are stocks overvalued? To answer this question, investors have developed several alternative equity valuation models. Typically, each of this models compares the stock market’s current price level to a benchmark. Among

Outside of price action, two of the most popular market characteristics analyzed are volume and volatility. Volatility is often used to determine market regime, while the traditional use for volume is to confirm price movement. This post will investigate the relationship between these two

Readers often send us great questions related to different ideas on systematic value strategies. The outcome of years of back and forth with readers and internal discussions is several books and hundreds of blog posts on the subject of value investing. So…What have we learned? We’ve learned a

Is the bitcoin market (Ethereum, Dash and Litecoin) efficient? After reading the paper, “Persistence in the cryptocurrency market”, which tries to answer that question, I was challenged by a colleague to replicate its results. This led me to write this post to highlight the great variability of

The case for holding a portfolio that’s diversified across markets and asset classes is built on the assumption that return correlations will remain below 1.0 (perfect positive correlation) by more than a trivial degree. To the extent that you own assets that move independently of one another

We study the theoretical implications of cointegrated stock prices on the profitability of pairs trading strategies. If stock returns are fairly weakly correlated across time, cointegration implies very high Sharpe ratios. To the extent that the theoretical Sharpe ratios are "too large,"

To bridge the gap between the quantitative community and discretionary investors, RavenPack launched the latest edition of its self-service data and visualization platform back in Fall 2017 - making it easier to create custom daily indicators on top of RavenPack’s granular data. Indicators which

I want to discuss three trading “truths” that I often heard but when I finally got into testing ideas found them to be myths. These discoveries were instrumental in turning my trading around. For those that know my story, it was not all roses and rainbows – what trading story is?!? I actually

Bracket templates can be downloaded here. Bracket submissions must be sent here with a subject of "March Madness 2018" by 11:59PM Eastern time on Wednesday March 14, 2018. On the heels of ReSolve’s past four years of progressive March Madness bracket challenges, we are pleased to take

Tactical asset allocation, by its nature, generates more transactions than buy & hold. Investors trading in taxable accounts would be justifiably concerned that the negative tax consequences of that might outweigh the benefits of TAA by shifting returns to less advantageous short-term capital

Are there variations in the methods that funds use to manage risk? Do hedge funds practicing risk management outperform other funds during periods of financial crisis? Are there differences in the type of risk management practices in terms of performance? Are there competing explanations that may

Over the past few years, ReSolve Asset Management has progressively worked to develop new and exciting rules for the March Madness bracket tournament. While the stakes may be much lower than in investing, many of the lessons we have learned translate well to portfolio construction and strategy

A foreword for the regular reader: this article has nothing to do with R With the increase of market “electronification”, algorithmic trading is becoming more and more popular. As a result, the regulator has paid a particular attention to this activity in the MIFID II regulation, designing a

Economic cycles have a clear impact on factor performance Some factors show pro-cyclical while others highlight anti-cyclical characteristics Given that real GDP is not published in real-time, it is unlikely effective for factor selection INTRODUCTION Financial commentators frequently explain a

The employment report has helped to spark a big rally today, and the NASDAQ is hitting new all-time highs. I looked back at other instances where the NASDAQ spiked higher and closed at a new high on the day of an employment report. The results I saw were compelling. Here are the list of instances

This paper shows that currency carry trades can be rationalized by the time-varying risk premia originating from the sovereign solvency risk. We find that solvency risk is a key determinant of risk premia in the cross section of carry trade returns, as its covariance with returns captures a

Note: I usually write more technical posts, this is an opinion piece. And you know what they say: opinions are like feet, everybody’s got a couple. Machine learning is simply statistics A lot of buzz words nowadays. Data Science, business intelligence, machine learning, deep learning, statistical

High net worth individuals, university endowments, and public pension funds have heavily invested in long/short equity hedge funds. But is the long/short equity asset class benefiting investors? The pitfalls of expensive financial products are well documented in the academic literature; however, the

The State of Trend Following index opened the year with strong returns, but February brought the index down with a strong negative performance. Please check below for more details. Detailed Results The figures for the month are: February return: -8.16% YTD return: -1.94% Below is the chart

Few investors hold explicit shorts in their portfolio, but all active investors hold them We (re-)introduce the simple framework of thinking about an active portfolio as a combination of a passive benchmark plus a long/short portfolio. This decomposition provides greater clarity into the often

The literature shows that macroeconomic factors can drive asset returns, however, economists and investment teams operate independently. In this paper, the authors attempt to bring macroeconomic discipline to tactical asset allocation by highlighting macroeconomic “dashboards:” The authors

It is my pleasure to deliver a long-awaited QaR ebook on the introduction to blockchain and cryptocurrencies with Python on April 15, 2018. In the book we will cover inter alia the fundamental aspects of blockchain in general; the craze around cryptocoins like Bitcoin, Ether, LiteCoin, etc.; their

This test is based on the Efficiente Index from JP Morgan. A variation of this strategy is available via the ETF EFFE. The strategy uses traditional mean-variance optimization (aka the “Efficient Frontier”) to trade a broad basket of asset classes, but it’s actually a momentum strategy in

According to MorningStar assets under management of smart beta products breached $1 trillion in 2017 and more than half of the assets were invested in just three factors: Value, Growth and Dividend Yield. Naturally there is a significant amount of empirical evidence that suggests Value stocks

This post will discuss the consequences of ProShares’ decision to change the investment objective of SVXY, and possible alternatives that various investors can use to try and create an identical exposure if their strategy calls for such an instrument. So, to begin with, Proshares recently decided

I am currently working on a method of predicting/projecting cyclic price action, based upon John Ehlers' sinewave indicator code, and to test it I am using Octave's implementation of a Hidden Markov model in the Octave statistics package hosted at Sourceforge. Basically I measure the

Last night I looked at 3-day pullbacks a number of ways in relation to current market conditions. I thought blog readers might find the following interesting. I noted that SPX closed lower by greater than 1% for the 3rd day in a row on Thursday. In the past, that has often been followed by gains the

This is a summary of the recent performance of a wide range of excellent tactical asset allocation strategies. These strategies are sourced from books, academic papers, and other publications. While we don’t (yet) include every published TAA model, these strategies are broadly representative of

The events of the past month, most notably the implosion of XIV, has focused public interest on volatility as an asset class. They’ve also illustrated that short vol as a strategy might be a little more risky than advertised (gasp!). The VIX is supposed to serve as a gauge of how much uncertainty

The main objective is to identify and understand cross-sectional patterns in expected stock returns in PSX(Pakistan Stock Exchange). Our reasons for doing so are simple. First, to effectively execute empirical asset pricing research, it is important to have a deep understanding of the

Well that was fun! I have been telling my trading buddy and anyone else that would listen that I fully expected XIV to open at zero one day. Now I did not expect it to happen so soon or the way it did. I trade a strategy that can be long XIV or long VXX or in cash. Because of the very likely

What are the research questions? This study uses a new classification system for informed vs. uninformed retail trades: short selling stocks without options available indicates more informed trading than short selling stocks with options available. Is there a difference in returns between shorted

wn Day a Black Swan? On February 5, the SP500 experienced a drop of 4% in a day. We ask ourselves the question: is a one-day 4% drop a common occurrence? The table below shows the number of 4% (or more) down days since 1970. 4% down 4% down and bullish From 1970 40 5 On average, a 4% down day

SPY gapped up and closed lower Tuesday after leaving an unfilled up gap on Monday. This triggered a simple study that I have examined a number of times over the years in the subscriber letter. The study can be found below. 2018-02-28 The numbers here all look solidly bullish, suggesting a potential

After 2008, tactical ETF strategies rose in popularity. We often come across advisors who self-implement their own tactical strategies, using simple measures of momentum and trend. We believe that thoughtful implementation of tactical strategies requires admission that tactical choices will be wrong

Factor portfolios do not benefit significantly from intra-month rebalancing However, too infrequent rebalancing leads to lower risk-return ratios The robustness of factor performance at different rebalancing periods is one of the advantages of factor investing INTRODUCTION Creating factor portfolios

I mentioned in a Tweet on Friday that the low volume on Friday’s rally was a bit concerning. The study below is one I featured in the subscriber letter this weekend. It examined other times substantial rallies occurred during uptrends on very light volume. 2018-02-25 Stats here suggest a downside