Quant Mashup Watch presentations from R/Finance 2017 [Revolutions]It was another great year for the R/Finance conference, held earlier this month in Chicago. This is normally a fairly private affair: with attendance capped at around 300 people every year, it's a somewhat exclusive gathering of the best and brightest minds from industry and academia in(...) A single value to measure equity market correlation [Quant Bear]There exists a vast amount of studies that show an increase in correlation between global equity indices during bear markets and propose ways to measure/forecast this correlation (see for example Campbell, Koedjik and Kofman or Capiello, Engle and Sheppard, and many, many more). These studies differ(...) Can A Simple Market Timing Indicator Be Beat? [Alvarez Quant Trading]As long time readers of my blog know, I often use a market timing indicator in my strategies. My favorite one, and a simple one, is using the 200 day moving average on either the SPY or S&P 500 Index. I recently ran into these posts, Using Market Breadth To Gauge Market Health (Part 5) and(...) Portfolio Rebalancing Research: Momentum and Tolerance Bands [Alpha Architect]If you are looking for research on stock selection, you’re in luck — the research is everywhere and has arguably been overdone. Get started with Moon Cycles & Stock Market Returns and The Congressional Calendar & Stock Market Returns to get a sense for how esoteric the research has(...) What are the Different Types of Quant Funds? [Quant Start]This is the third in a series of posts written by Frank Smietana, an expert guest contributor to QuantStart. In this detailed post Frank examines the different algorithmic trading strategies carried out by quantitative hedge funds. Click for parts one and two. - Mike. Institutional asset managers(...) Why Bitcoin is the Ultimate Safe Haven Asset [Signal Plot]In 2008, in the middle of the global financial crisis, Satoshi Nakamoto published a white paper describing the bitcoin protocol. The bitcoin blockchain then came into existence on January 3, 2009 when Nakamoto created the genesis block — the first block of the blockchain. All subsequent blocks(...) SPX Dips After Persistent Move To A New High – What’s the Next Move? [Quantifiable Edges]One compelling study that triggered tonight suggested the recent persistent upmove is unlikely to abruptly end. (This is a theme we have seen many times over the years.) It considers what happens after SPX moves up at least 5 days in a row to a 50-day high, and then pulls back. (This is the current(...) Beta Convexity [Jonathan Kinlay]Around a quarter of a century ago I wrote a paper entitled “Equity Convexity” which – to my disappointment – was rejected as incomprehensible by the finance professor who reviewed it. But perhaps I should not have expected more: novel theories are rarely well received first time around. I(...) Academic Research Insight: Factor Investing Over the Long Run [Alpha Architect]Title: FACTOR BASED INVESTING: THE LONG TERM EVIDENCE Authors: ELROY DIMSON, PAUL MARSH, AND MIKE STAUNTON Publication: THE JOURNAL OF PORTFOLIO MANAGEMENT, 2017, SPECIAL ISSUE (version here) What are the research questions? Is there out-of-sample (OOS) evidence for factor investing? What are the(...) Get Fed Day Research & Tools While Helping Fight Multiple Sclerosis [Quantifiable Edges]Quantifiable Edges is now offering our Fed Day research and tools to anyone that makes any size donation to the MS Society! Keep reading for details. One bit of research that Quantifiable Edges has become known for are the many studies I have published on Fed Days. In fact, you could say I wrote the(...) Big Little Details [Flirting with Models]Limited attention drives us to focus on the big details of investment strategies. Small details can have an outsized impact on performance, especially if they can compound upon one another. To quote Aaron Brown, Head of Risk at AQR: “It takes a lot of compounding to turn a mistake into a disaster.(...) Evaluating Trading Strategies with Random Portfolios [Geodesic Edge]Active asset management has been under attack during the past several months. Hedge funds have been shutting down left and right, labeled as overpriced and underperforming, and are losing capital to low cost passive mutual funds and ETFs. Active mutual funds have been losing ground as well to their(...) March for the Fallen: Get Fit with Alpha Architect [Alpha Architect]As a former US Marine, Memorial Day is every day, however, Memorial Day is special because the time is set aside to reflect on those who paid the ultimate sacrifice. Enjoy and stay safe out there! In addition to enjoying the long Memorial Day weekend, we offer a unique opportunity to honor the(...) Testing the Hierarchical Risk Parity algorithm [QuantStrat TradeR]This post will be a modified backtest of the Adaptive Asset Allocation backtest from AllocateSmartly, using the Hierarchical Risk Parity algorithm from last post, because Adam Butler was eager to see my results. On a whole, as Adam Butler had told me he had seen, HRP does not generate outperformance(...) Research Review | 26 May 2017 | Smart Beta [Capital Spectator]How much higher can smart beta adoption climb? Now in its fourth year, FTSE Russell’s latest annual survey of global institutional asset owners indicates that smart beta adoption is at an all time high and that investors continue to find new applications for its use. The survey, Smart beta: 2017(...) An Analysis of Momentum Behaviour in the Long-Term [Quantpedia]Motivated by behavioral theories, we test whether recent past performance of the momentum strategy (Past Momentum Performance--PMP) negatively predicts the performance of stale momentum portfolios. Following periods of top-quintile PMP, momentum portfolios exhibit strong reversals 2-5 years after(...) Vix Spx Seasonality By Month, Even Keel [Voodoo Markets]While seeing some “sell in may” headlines a while ago, thought i’d pull up the monthly mean returns for spx and vix. I wanted to see them on an even keel, so that each month starts at 0%, to better gauge their monthly behaviour 1 2 3 4 5 6 7 8 9 import pandas as pd import numpy as np import(...) Yes. Demographics and Economic Growth Matter for Equity Returns [EconomPic]Quick note... for those not already listening, my buddy Patrick O’Shaughnessy has one of the (if not the) best investing podcasts out there with his podcast Invest Like the Best. Each week he sits down with some of the best capital allocators, investment thinkers, etc... in the world and really(...) The Value Premium: Risk or Mispricing? [Alpha Architect]One of the great debates in finance is whether the source of the value premium is risk-based or a behavioral anomaly. In our book, “Your Complete Guide to Factor-Based Investing,” my co-author Andrew Berkin and I present the evidence showing that there are good arguments on both sides. Thus,(...) How Many Assets Are Needed To Test a K-Factor Model? [Alex Chinco]Imagine you’re a financial economist who thinks that some risk factor,{\color{white}i}f_t, explains the cross-section of expected returns. And, you decide to test your hunch. First, you regress the realized returns of N different assets on{\color{white}i}f_t to estimate each asset’s exposure to(...) The Case for Tactical Alpha, Part 3: The Greatest Trick Wall Street Ever Pulled [Invest Resolve]The investment industry has investors convinced that the only path to better performance is through stock selection. As a result, most investors approach the challenges of portfolio construction exactly backward and miss out on the most important opportunities to produce differentiated performance.(...) Academic Research Insight: The Social Media Factor [Alpha Architect]are to Editor’s Note: The Academic Research Insight will be a weekly short-form research summary on research that is directly related to investing. Elisabetta Basilico (a PhD and a CFA!) will be driving the effort, which will supplement our long-form summaries, in-house research, and general(...) An Example of Python Trading Strategy in Quantiacs Platform [Quant Insti]Algorithmic trading has seen great traction in recent years and the numbers of students, engineering graduates, and finance professionals looking to explore this lucrative domain has been growing exponentially with each passing year. Are you among the ones looking to learn quant skills and also make(...) The Marcos Lopez de Prado Hierarchical Risk Parity Algorithm [QuantStrat TradeR]This post will be about replicating the Marcos Lopez de Prado algorithm from his paper building diversified portfolios that outperform out of sample. This algorithm is one that attempts to make a tradeoff between the classic mean-variance optimization algorithm that takes into account a covariance(...) Can We Improve Sector Rotation? [Flirting with Models]Momentum-based sector rotation is a popular investment strategy. Recent academic studies have shown that alternative implementations of standard momentum – including risk-adjusted momentum, residual momentum, and “frog-in-the-pan” momentum – can significantly improve the risk-adjusted and(...) Rough Path Theory and Signatures Applied To Quantitative Finance - Part 2 [Quant Start]his is the second in a new advanced series of posts written by Imanol Pérez, a PhD researcher in Mathematics at Oxford University, and a new expert guest contributor to QuantStart. In this post Imanol continues the theoretical discussion of Rough Paths and Signatures and begins applying them within(...) The time has come: setting up a DB with MySQL and R [Quant Bear]The recent decision by Yahoo to screw with their API for financial data (and in the process disabling all packages/functions in various programing languages obtaining EOD (end-of-day) data, at least temporarily) shows us two important things: Nothing is free and reliable forever It’s a good idea(...) How to Scrape and Parse 600 ETF Options in 10 mins with Python and Asyncio [Black Arbs]This is Part 1 of a new series I'm doing in semi real-time to build a functional options data dashboard using Python. There are many underlying motivations to attempt this, and several challenges to implementing a tool like this from scratch. Where to get the data? Is it affordable? Easily(...) Solved: Errors Downloading Stock Price Data from Yahoo Finance [Robot Wealth]Recently, Yahoo Finance – a popular source of free end-of-day price data – made some changes to their server which wreaked a little havoc on anyone relying on it for their algos or simulations. Specifically, Yahoo Finance switched from HTTP to HTTPS and changed the data download URLs. No doubt(...) Yahoo is dead, long live Yahoo! [Trading with Python]On 18 May 2017 the ichart data api of yahoo finance went down, without any notice. And it does not seem like it is coming back. This has left many (including me) with broken code and without a descent free end-of-day data source. Something needs to be done. Now. Apparently Yahoo! does not want us to(...) An Example of Trading Model Design by Richard Olsen (Founder of @OANDA) [Quantpedia]We introduce a new approach to algorithmic investment management that yields profitable automated trading strategies. This trading model design is the result of a path of investigation that was chosen nearly three decades ago. Back then, a paradigm change was proposed for the way time is defined in(...) Bye Yahoo, and thanks for all the fish [Financial Hacker]Just a quick post in the light of a very recent event. Users of financial functions of R, MatLab, Python, or Zorro got a bad surprise in the last days. Many scripts and programs based on historical price data suddenly don’t work anymore. And our favorite free historical price data provider, Yahoo,(...) Constant Expiry VIX Futures (Using Public Data) [QuantStrat TradeR]This post will be about creating constant expiry (E.G. a rolling 30-day contract) using VIX settlement data from the CBOE and the spot VIX calculation (from Yahoo finance, or wherever else). Although these may be able to be traded under certain circumstances, this is not always the case (where the(...) A Direct Test of the Dividend Catering Hypothesis [Alpha Architect]Why do CEOs decide to pay dividends? That is an interesting question, and one that academics have been researching for years. Miller and Modigiliani in 1961 show that if one assumes perfect and efficient capital markets, and investors should have no preference as to whether or not a firm pays(...) Setting up an Algorithmic Trading Business [Quant Start]This is the second in a series of posts written by Frank Smietana, an expert guest contributor to QuantStart. In this detailed post Frank takes a look at the different ways in which an algorithmic trading business can be established—and why you might want to consider it. - Mike. Setting up an(...) The Case for Tactical Alpha, Part 2: The Fundamental Flaw of Grinold’s Fundamental Law [Invest Resolve]We suspect you’re skeptical, and that’s a good thing. In fact, the more skeptical you are, the more you need to download our full 26-page paper “Tactical Alpha: A Quantitative Case for Active Asset Allocation.” In it, we discuss research from such luminaries as Brinson, Ibboston and Kaplan,(...) People are worried about the VIX [Investment Idiocy]"Today the VIX traded below 10 briefly intraday. A pretty rare occurrence. Since 1993, there have been only 18 days where it traded below 10 intraday and only 9 days where it closed below 10." (source: some random dude on my linkedin feed) ... indeed 18 observations is a long.... long...(...) CAPE Ratio, Why Have Thou Forsaken Me? [Meb Faber]A lot of people look at this bull market, valuations, and think somehow that value has forsaken us. And that the much discussed CAPE ratio doesn’t work. They look at the CAPE ratio, at a current value of about 30 in the US, and think somehow that markets rising along with multiples expanding(...) A Review of Gary Antonacci’s Dual Momentum Investing Book [QuantStrat TradeR]This review is a book review of Gary Antonacci’s Dual Momentum Investing book. The TL;DR: 4.5 out of 5 stars. So, I honestly have very little criticism of the book beyond the fact that the book sort of insinuates as though equity momentum is the be-all-end-all of investing, which is why I deduct a(...) Pattern matching Cryptocurrencies [Ennlightenment]Bitcoin, Ethereum and some other cryptocurrencies seem to be in the spotlight again due to their most recent acceleration. C_y2pGfXoAApvdI Source: CEOTechnician Ethereum is up multiples since January. I thought we could take a look at importing Etherum price data in R and then seeing if we can draw(...) Navigating Municipal Bonds With Factors [Flirting with Models]In this case study, we explore building a simple, low cost, systematic municipal bond portfolio. The portfolio is built using the low volatility, momentum, value, and carry factors across a set of six municipal bond sectors. It favors sectors with lower volatility, better recent performance, cheaper(...) Rough Path Theory and Signatures Applied To Quantitative Finance - Part 1 [Quant Start]To date QuantStart has generally written on topics that are applicable to the beginner or intermediate quant practitioner. However we have recently begun to receive requests from academics and advanced practitioners asking for more content on research-level topics. This is the first in a new series(...) Chinese Market Anomaly - The Factor Killer? [Alpha Architect]The Oracle of Omaha just commented on the Chinese stock market in this year’s Berkshire’s annual meeting: …Markets have a casino characteristic that has a lot of appeal to people, particularly when they see people getting rich around them. And those who haven’t been through cycles before are(...) Can We Use Mixture Models to Predict Market Bottoms? (Part 3) [Black Arbs]Thus far in the series we've explored the idea of using Gaussian mixture models (GMM) to predict outlier returns. Specifically, we were measuring two things: The accuracy of the strategy implementation in predicting return distributions. The return pattern after an outlier event. During the(...) Do Mutual Fund Managers Have Stock-Picking Skill in Lottery Stocks? [Quantpedia]Are portfolio managers skilled in stock-picking? It is a popular subject for academic research and majority of papers show that active funds underperform their respective benchmarks. But... It doesn't mean professionals do not know how to pick stocks. It can simply mean that a lot of managers(...) Do Trading Costs Destroy Factor Investing? [Alpha Architect]There are a number of recent studies that propose a more rigorous criteria for evaluating the practical significance of factors published in academic research journals. First, Harvey, Liu, and Zhu (2015) argue that a t-stat of 3 should be replacing the old 2 as a rule for statistical significance.(...) Risk Premia Market Timing? [Quant Bear]Here it goes, finally a strategy backtest (sort of) on this blog (what an intro). In their 1973 paper “Risk, Return and Equilibrium: Empirical Tests”, Fama and MacBeth introduce a method for estimating betas and risk premia for any risk factors that determine asset prices. Under the assumption(...) Shrinkage in statistics [Eran Raviv]Shrinkage in statistics has increased in popularity over the decades. Now statistical shrinkage is commonplace, explicitly or implicitly. But when is it that we need to make use of shrinkage? At least partly it depends on signal-to-noise ratio. Introduction The term shrinkage, I think, is the most(...) Luck in Trading and Favorable Distributions [Build Alpha]The role of luck in (algorithmic) trading is ever present. Trading is undoubtedly a field that experiences vast amounts of randomness compared to mathematical proofs or chess, for example. That being said, a smart trader must be conscious of the possibility of outcomes and not just a single outcome.(...) Tactical Permanent Portfolio from GestaltU and ReSolve Asset Management [Allocate Smartly]This is a test of the Tactical Permanent Portfolio from the brains at GestaltU and ReSolve Asset Management. The strategy adds a number of dynamic features to a classic buy & hold strategy to better manage volatility and losses. Results from 1970, net of transaction costs, follow. Read more(...)