Quant Mashup Kelly versus Classical portfolio theory, and the two kinds of uncertainty premium [Investment Idiocy]Since I was a young lad there has been an ongoing fight in Financial Academia 'n' Industry between two opposing camps: In the red corner are the Utilitarians. The people of classical finance, of efficient frontiers, of optimising for maximum return at some level of maximum risk. In the(...) Update on Improved Currency Strength Indicator [Dekalog Blog]Following on from my previous post I have now slightly changed the logic and coding behind the idea, which can be seen in the code snippet below Essentially the change simultaneously optimises, using Octave's fminunc function, for both the gold_x and all currency_x geometric multipliers(...) Machine Learning for Financial Market Prediction With Sklearn and Keras [Alpha Architect]Recently, Wes pointed me to this interesting paper by David Rapach, Jack Strauss, Jun Tu and Guofu Zhou: “Dynamic Return Dependencies Across Industries: A Machine Learning Approach.” The paper presents a strategy that forecasts industry returns and shows excellent historical returns. In this(...) Tactical Asset Allocation in May [Allocate Smartly]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 Strength Of Two Unfilled Up Gaps & A 50-Day High [Quantifiable Edges]One interesting study that I discussed in last night’s subscriber letter considered the fact that SPY left an unfilled upside gap for the 2nd day in a row while closing at a 50-day high. The results table I shared can be found below. 2018-06-05 The size of the follow-through isn’t terribly(...) Currency Management with FX Style Factors [Quantpedia]Currency hedging is often approached with an all-or-nothing mentality: either full hedging of all foreign exchange (FX) positions or no hedging at all. As a more nuanced alternative, we suggest systematically harvesting the benefits of the FX style factors carry, value and momentum. In particular,(...) ETF Rotation Strategies in Zorro [Robot Wealth]At Robot Wealth we get more questions than even the most sleep-deprived trader can handle. So whilst we develop the algo equivalent of Siri and brag about how we managed to get 6 hours downtime last night, we thought we’d start a new format of blog posts — answering your most burning questions.(...) A Season for Sectors [Flirting with Models]Seasonality is an effect that shows up in data but is difficult to justify from a theoretical perspective using behavioral, risk-based, or structural reasoning. However, diving deeper into the effect within the U.S. sectors, we find that seasonality has been economically significant and surprisingly(...) The Inconsistent Performance of Value and Size Factors in the Chinese A-Share Market [Alpha Architect]What are the research questions? Does the Fama-French “size” factor explain the cross-section of stock returns in the Chinese A-share market? Does the Fama-French “value” factor explain the cross-section of stock returns in the Chinese A-share market? What are the Academic Insights? YES. The(...) Factors from Scratch with Philosophical Economics (@Jesse_Livermore)With a million dollars to invest today, would you rather buy a portfolio of New York City taxi medallions or shares in Uber stock? When we ask investing audiences this question, the answer is almost always Uber. People tend to think in terms of fundamental growth without also thinking about price.(...) Market Timing with Multiples, Momentum and Volatility [Factor Research]Equity multiples have been elevated in recent years Using valuation multiples for allocation decisions is a challenging strategy Momentum and volatility-based strategies are more attractive INTRODUCTION In recent years the stock market in the US has been expensive on a variety of valuation(...) Kalman Filter Techniques And Statistical Arbitrage In China's Futures Market In Python [Quant Insti]This article is the final project submitted by the author as a part of his coursework in Executive Programme in Algorithmic Trading (EPAT™) at QuantInsti®. Do check our Projects page and have a look at what our students are building. About the Author Xing Tao is a Bachelor in Computer Science(...) Sharpe Ratio > 1 : Careful What You Wish For [Quantum Financier]I had the pleasure to hang out with the good folks over at Resolve Asset Management recently. Part of our discussion centered around the differences between our two worlds. As you can imagine, prop trading is fairly different from institutional asset management. A topic of particular interest to(...) Shapley Value Allocation of Operational Risk Capital Charges using Airport Problem Solution [Quant At Risk]In Financial Risk Management the most challenging part for quantitative modeling is, beyond any doubt, the Operational Risk (Ops Risk). It is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal(...) A simple rule for exchange rate trends [SR SV]Over the past decades developed market exchange rates have displayed two important regularities. First, real exchange rates (nominal exchange rates adjusted for domestic price trends) have been mean reverting. Second, the mean reversion has predominantly come in form of nominal exchange rate trends.(...) Factor Regressions Problems and How to Fix Them [Alpha Architect]Factor Regressions are one way to ascertain a fund’s exposure to certain factors that an investor/advisor may want to allocate towards, such as Value, Momentum, Quality, etc. Luckily, there are some great free tools available online, such as portfoliovisualizer.com, that allows investors to run(...) The Big Data and Machine Learning Revolution: Event takeaways, slides & videos [Raven Pack]More than 600 finance professionals registered to attend the London Revolution. An excellent group of top finance professionals shared their latest research and experience with big data and machine learning. The event took place on April 24, 2018 at the Banking Hall, one of the most exquisite venues(...) Sharpening the Arithmetic of Active Management [Alpha Architect]For many investors, the superiority of passive investing over active investing is axiomatic (Earth to passive investors; Lunch is never free!) And why not? Study after study has demonstrated that only a small portion of actively managed funds beat their benchmarks over long time frames. A recent(...) Style Investing in Fixed Income [Alpha Architect]The paper investigates this issue by answering the following research questions: Can common robust risk premia (value, momentum, carry and defensive) enhance returns in Fixed Income investing? Do style-based Fixed Income portfolios present diversifying potential? Is a long/short implementation(...) Dollar-Cost Averaging: Improved by Trend? [Flirting with Models]The choice to lump sum invest (“LSI”) or dollar-cost average (“DCA”) is one fraught with emotion. Intuition tells us that LSI likely offers the best bet for long-term investors as markets, in general, tend to go up. However, can signals derived from simple trend models offer an edge? We find(...) How Seasonality The Week Of Memorial Day Has Changed Over The Years [Quantifiable Edges]Happy Memorial Day! The week of Memorial Day has shown some interesting seasonal tendencies over the years. But it has faltered greatly the last few. The chart below is one I have shown in the past, and have now updated. It examines SPX performance from the Friday before Memorial Day to the Friday(...) Short-Term Return Reversals and Intraday Transactions [Quantpedia]I examine whether a short-term reversal is attributed to past intraday or overnight price movements. The results show that intraday returns significantly reverse in the following week, while overnight returns do not, indicating that the short-term reversal is attributed to past intraday price(...) Tactical Mean-Reversion [Factor Research]The Mean-Reversion factor is driven by volatility Allocating tactically when volatility is high generates an attractive payoff profile The strategy can be considered as a tail risk hedge for equity portfolios INTRODUCTION Our most recent research note focused on the Mean-Reversion factor (please see(...) An Improved Currency Strength Indicator plus Gold and Silver Indices? [Dekalog Blog]In the past I have blogged about creating a currency strength indicator ( e.g. here, here and here ) and this post talks about a new twist on this idea. The motivation for this came about from looking at chart plots such as this, which shows Gold prices in the first row, Silver in the second and a(...) Investor Attention and the Low Volatility Anomaly [Alpha Architect]One of the big problems for the first formal asset pricing model developed by financial economists, the Capital Asset Pricing Model (CAPM), was that it predicts a positive relationship between risk and return. However, the historical evidence demonstrates that while the slope of the security market(...) Research Review | 25 May 2018 | Business Cycle Risk [Capital Spectator]Is Fertility a Leading Economic Indicator? Kasey Buckles (University of Notre Dame), at al. March 28, 2018 Many papers show that aggregate fertility is pro-cyclical over the business cycle. In this paper we do something else: using data on more than 100 million births and focusing on within-year(...) Trading the Equity Curve – More Ideas [Alvarez Quant Trading]A couple posts ago, I looked at Trading the Equity Curve and found interesting results but nothing that made me decide this works for me. Using the equity curve to decide when to stop trading a strategy just sounds like it should work. But for me it is always about testing. I cannot count how often(...) Using Quadratic Discriminant Analysis To Optimize An Intraday Momentum Strategy [Quant Insti]In this post, we will create an intraday momentum strategy and use QDA as a means of optimizing our strategy. We’ll begin by reviewing Linear Discriminant Analysis or LDA and how it is associated with QDA, gain an understanding of QDA and when we might implement this technique instead of Linear(...) Dimensions of Return [Factor Investor]There are three universal dimensions of return that drive the performance of all strategies—regardless of investment style or asset class: consistency, magnitude, and conviction. These dimensions serve as levers that can increase or decrease performance of any strategy. They also provide context(...) What to do with Underperforming Investments? Assessment via Bayesian Inference [Alpha Architect]Assume you made a decision to invest in an active strategy based on, say, a backtest of the underlying process (to be clear, active means NOT passive market-cap weight in my context). Over the next few years, you sit in the strategy watching it underperform the passive benchmark. You are a(...) Interesting Insights into Trend-Following Strategies [Quantpedia]Because of the adaptive nature of position sizing, trend-following strategies can generate the positive skewness of their returns, when infrequent large gains compensate overall for frequent small losses. Further, trend-followers can produce the positive convexity of their returns with respect to(...) Biclustering time series [Quant Dare]In this post, we’ll take a brief look at biclustering algorithms. They reveal easily interpretable patterns in our data and give us more information about the links between observations and features than simpler clustering algorithms usually do. We’ve already reviewed a number of non-supervised(...) Technical Analysis in the Chinese Stock Market: Does it Work? [Alpha Architect]The authors conduct a comprehensive analysis of five categories of technical trading rules (including channel break rules, filter rules, moving average rules, oscillator rules and support/resistance rules) using aggregate data from the Chinese stock market for the period 1997 to 2015. Do technical(...) Separating Ingredients and Recipe in Factor Investing [Flirting with Models]Portfolio construction is a lot like cooking. There are two equally important elements: the ingredients and the recipe. The ingredients are the signals that are used to select investments. The recipe is the set of rules used to transform those signals into portfolio allocations. In factor investing,(...) Mean-Reversion Across Markets [Factor Research]Volatility spiked in the first quarter of 2018 when global stock markets declined, which was mainly due to concerns on proposed tariffs by the US government and rising interest rates. Since then markets recovered and volatility declined again, but higher interest rates are likely to have a negative(...) Commodity pricing [SR SV]A new paper combines two key aspects of commodity pricing: [1] a rational pricing model based on the present value of future convenience yields of physical commodity holdings, and [2] the activity of financial investors in form of rational short-term trading and contrarian trading. Since convenience(...) Explaining the Demand for Higher Beta Stocks [Alpha Architect]The Capital Asset Pricing Model (CAPM) indicates returns should go up linearly as beta increases (in other words, risk and return are positively related). However, as I’ve previously discussed, the historical evidence demonstrates that, while the slope of the security market line is generally(...) Is The Russell Breakout Likely To Spark A Rally In The SPX? [Quantifiable Edges]The new high in the Russell is notable, since it is the 1st major index to get there. But it does not necessarily mean the other indices will follow. In the study below I looked at SPX performance following instances of a fresh RUT breakout while SPX had still not broken out. 2018-05-17 Whether you(...) 5 Cutting Edge Investment Research Articles [Alpha Architect]This year’s annual financial research “geekfest,” officially known as the American Finance Association Annual Meeting, assembles the world’s top-tier academic researchers to discuss their latest financial research. Source: Wes’s art studio and a photo by Daniel Cheung If you are looking to(...) Alpha Momentum [Factor Research]Stocks can be ranked by alpha instead of stock returns Alpha Momentum generates a higher and more consistent performance than Price Momentum Momentum crashes are reduced significantly and risk-return ratios increase INTRODUCTION Alpha in finance is shrinking continuously as investors are getting(...) How to Benchmark Trend-Following [Flirting with Models]Benchmarking a trend-following strategy can be a difficult exercise in managing behavioral biases. While the natural tendency is often to benchmark equity trend-following to all-equities (e.g. the S&P 500), this does not accurately give the strategy credit for choosing to be invested when the(...) Giving Computers the Ability to Learn from Data [Golden Jumper]General concepts of Machine Learning 3 types of learning and basic terminology – Supervised learning. Learn a model from labeled training data that allows us to predict future or unknown data. Supervised refers to a set of sample where desired output signals (labels) are already known. Eg spam(...) SPX Performance Based on SOMA Action During the Present QT Initiative [Quantifiable Edges]The Fed’s System Open Market Account (SOMA is the account at the Fed that contains all of its bond purchase holdings. Fed SOMA data going back to 2003 can be downloaded from the New York Fed’s website. Over this time, there has been a strong relationship between the changes in the SOMA and(...) Position Sizing for Practitioners - Part 2: Dealing with Drawdown [Quant Fiction]What does “optimal” mean, anyway? In the first part of this series, we discovered that the staked fraction of capital that yields the greatest compounded returns also yields a less-than-optimal level of drawdown. To realize the greatest return on capital, an investor in SPY since its inception(...) Using yield curve information for FX trading [SR SV]FX carry trading strategies only use short-term interest rates (and forward basis) as signal. Yet both theoretical and empirical research suggests that the whole relative yield curve contains important information on monetary policy and risk premia. In particular, the curvature of a yield curve(...) Improving data diversity. Synthetic Financial Time Series Generator [Quant Dare]When dealing with data we (almost) always would like to have better and bigger sets. But if there’s not enough historical data available to test a given algorithm or methodology, what can we do? Our answer has been: creating it. How? By developing our own Synthetic Financial Time Series Generator.(...) Introducing Fed-Based Quantifiable Edges for Stock Market Trading (Research Paper) [Quantifiable Edges]I have shown Fed-based studies here at Quantifiable Edges since inception in 2008. And since 2010 I have closely tracked SOMA movement and its influence on the market in the Quantifiable Edges subscriber letter. This has proven extremely valuable in my research and trading. Now, after years of(...) Seasonal Strategy on US Equities + Genovest tests Quantpedia strategy [Quantpedia]We revisit a series of popular anomalies: seasonal, announcement and momentum. We comment on statistical significance and persistence of these effects and propose useful investment strategies to incorporate this information. We investigate the creation of a seasonal anomaly and trend model composed(...) Leverage and Trend Following [Flirting with Models]We typically discuss trend following in the context of risk management for investors looking to diversify their diversifiers. While we believe that trend following is most appropriate for investors concerned about sequence risk, levered trend following may have use for investors pursuing growth. In(...) Value Factor - Comparing Valuation Metrics [Factor Research]This research note was originally published at Alpha Architect. INTRODUCTION Mirror, mirror, on the wall – which is the fairest of them all? Recent commentary (to include a recent Barron’s article) seems to suggest that value is dead and may never come back. Of course, most of these comments(...)