Quant Mashup October Opex Week Historically Bullish [Quantifiable Edges]Option expiration week is often a pretty good week for the market. October is one of those months where it has been especially good over the years. This can be seen in the study below. 2017-10-16 I decided to exclude 2008 because action that week was such an incredible outlier that it greatly skewed(...) Tips To Start Your Own Business In Algorithmic Trading [Quant Insti]You are doing well at work but have always felt that need to cater to the aspiration of doing something more, building something of your own? You are passionate about the chosen field of work. You have already explored different organizations and their work processes extensively. Entrepreneurship(...) Replicating Anomalies [Alpha Architect]Academic research is amazing and incredibly useful for helping us better understand the complex world in which we live. In fact, academic research has literally rewired my brain at times. However, research isn’t perfect and the search for truth is messy. Data-mining. Overfitting. P-hacking.(...) Are U.S. Equity Momentum ETFs Working? [CXO Advisory]Are U.S. stock and sector momentum strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider five momentum-oriented U.S. equity ETFs with assets over $100 million, all currently available (in order of decreasing assets): iShares Edge MSCI USA Momentum Factor(...) Research Review | 13 October 2017 | Expected Return [Capital Spectator]The Most Dangerous (and Ubiquitous) Shortcut in Financial Planning John West and Amie Ko (Research Affiliates) September 2017 Using historical returns to forecast the future is one of the most common shortcuts in financial planning. Investment advisors who use only past returns to forecast future(...) Dividend Capture Strategy: Trade Execution Matters [Alpha Architect]One area in investing that is often overlooked by investors is trade execution, which relates primarily to commissions, bid-ask spreads, and price impact. Yet sometimes it is trade-execution alone that can make the difference between and profitable trade and an unprofitable one. In a new paper,(...) A Returns-based Approach: Incorporating Microcap in Equity Allocations [Factor Investor]We are often asked how much of a plan’s assets should be allocated to microcap equities. As long-term investors that view the opportunity set through the lens of factors, our answer is usually some version of "probably more than you currently do." Microcap is a very challenging asset(...) Replicating Indexes In R With Style Analysis: Part I [Capital Spectator]In the quest for clarity in portfolio analytics, Professor Bill Sharpe’s introduction of returns-based style analysis was a revelation. By applying statistical techniques to reverse engineer investment strategies using historical performance data, style analysis offers a powerful, practical tool(...) The Kelly Criterion and Option Trading [Highly Evolved Vol]The Kelly criterion can be used to calculate the optimal size of a trade. Specifically, it gives the size that increases the trader's account at the fastest possible rate. It is possible that a given trader might not actually want this. She might want some sort of volatility or draw down(...) Problems in the Optimization of Swing Portfolios [QUSMA]Assume you have a bunch of different systems that trade stocks, equity index ETFs, bond ETFs, and some other alternative assets, eg commodity ETFs. All the systems take both long and short positions. What are the questions your portfolio optimization approach must answer? This is a post focused on(...) Academic Research Insight: Does Social Capital payoff during times of crisis in the markets? [Alpha Architect]Title: Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis Authors: Karl V. Lins, Henri Servaes, and Ane Tamayo Publication: The Journal of Finance, Vol. LXXII, No. 4, August 2017 The present financial crisis springs from a(...) Death, Taxes, and Mean-Reversion? [Factor Research]SUMMARY Mean-reversion has not performed well over the last few years Highly sensitive to model assumptions The strategy is an attractive addition for an equity-centric portfolio INTRODUCTION According to Benjamin Franklin death and taxes are the only two certainties in life. In finance, where much(...) Tactical, But When? [Flirting with Models]We’re often asked, “is now a good time to implement tactical strategies?” We believe there are better and worse periods for tactical, largely based upon expected risk/reward trade-offs and available diversification opportunities. For investors, we believe an equally important consideration is(...) Analyzing A South African Financial News Twitter Corpus using a Topic Model [Top of The Bell Curve]Over the past decade there has been an increase in the amount of digital information that is available. In particular, there is now vasts amount of data that is available on social media platform such as twitter and Facebook that can be analysed to gain further insight and to establish sentiment(...) getSymbols and Alpha Vantage [Foss Trading]Thanks to Paul Teetor, getSymbols() can now import data from Alpha Vantage! This feature is part of the quantmod 0.4-11 release, and provides another another data source to avoid any Yahoo Finance API changes*. Alpha Vantage is a free web service that provides real-time and historical equity data.(...) Volume Filters (Part 2) | Trading Strategy (Entry & Exit) [Oxford Capital]Developer: Joseph Granville (On-Balance Volume); R. D. Donchian (Breakout Channels). Concept: Trading strategy based on price breakouts confirmed by OBV (On-Balance Volume) filters. Research Question: Can volume filters improve price breakouts? Specification: Table 1. Results: Figure 1-2. Trade(...) Reconciling Individual Stock Returns and Factor Portfolio Returns [Alpha Architect]Those in the financial media have recently been writing multiple stories on a fascinating working paper, “Do Stocks Outperform Treasury Bills?” by Hendrik Bessembinder. We originally highlighted the paper on our blog in January. However, recent stories by those at the New York Times (here and(...) Comparing Supervised Learning Methods for Hang Seng Futures Long/Short Strategy [Golden Compass]Trend prediction in financial markets is a very complex task, due to the fact that prices are inherently noisy, non-stationary, and deterministically chaotic. In recent years, studies have leveraged various machine learning algorithms to tackle this task. Leung, Chen, and Daouk (2001) used a(...) Strong down performance for trend following in September [Wisdom Trading]September 2017 Trend Following: DOWN -5.31% / YTD: -21.01% The Wisdom State of Trend Following index had a rough September, unfortunately following the trend of the last 18 months and going through the -20% mark for the year so far. With only 3 months to go, 2017 is shaping up to be a strong(...) Indicator Comparison: Ehler My Stochastic Indicator, RSI and ConnorsRSI [Alvarez Quant Trading]Like all traders, I am always on the lookout for any new indicators better than the ones I am using. I have been using and promoting RSI2 since 2004 for mean reversion trading. I created the ConnorsRSI in 2012. Am I married to these indicators? No. If I find something ‘better’ I will drop them.(...) Hiking Mountains, Gladly, To Honor The Fallen [Alpha Architect]Landon Thomas Jr. recently wrote an article in the New York Times regarding our participation in the recent March for the Fallen Event. Landon’s article was well-written and provided a compelling narrative. However, much of the attention of the article was focused on Alpha Architect and my(...) Capital Raising for Early Stage Quant Fund Managers - Part I [Quant Start]This is the first in a two part series of articles written by Frank Smietana, an expert guest contributor to QuantStart. In this article Frank takes a look at how early-stage quantitative hedge fund managers can go about looking to secure their first institutional allocation of capital. Please be(...) Suggestion of a New Currency Factor Model [Quantpedia]We examine the ability of existing and new factor models to explain the comovements of G10-currency changes. Extant currency factors include the carry, volatility, value, and momentum factors. Using a new clustering technique, we find a clear two-block structure in currency comovements with the(...) Factor Olympics: Q3 2017 [Factor Research]2017 is on track for a good year for factor exposure as most factors are positive Quality, Growth, and Momentum are headed for the winners podium Value is negative across regions, giving up all of last year’s gains INTRODUCTION We present the performance of six well-known factors on an annual(...) TAA vs buy and hold in overvalued markets (CAPE > 30 edition) [Investing For A Living]Personal note: Sorry for the long delay from posting. I had a death in the family this summer, a big overseas family wedding, and I’ve been working on getting my newsletter released, which I’ll announce in a later post. Now, I’m back. I was thinking this morning that with the increasing talk(...) Academic Research Insight: Volatility Wisdom of Social Media Crowds [Alpha Architect]Title: VOLATILITY WISDOM OF SOCIAL MEDIA CROWDS Authors: Ahmet K. Karagozoglu and Frank J. Fabozzi Publication: Journal of Portfolio Management, Winter 2017 (version here) What are the research questions? Using raw tweets from Twitter and StockTwits (“Trader Mood Data” from PsychSignal) a(...) Analyzing the FDIC Dataset [Jonathan Kinlay] The Frustrating Law of Active Management [Flirting with Models]In an ideal world, all investors would outperform their benchmarks. In reality, outperformance is a zero-sum game: for one investor to outperform, another must underperform. If achieving outperformance with a certain strategy is perceived as being “easy,” enough investors will pursue that(...) When Months Finish At A High [Quantifiable Edges]urn of the month will often trigger some seasonal studies. The study below looks at performance after times that SPY has closed a month at the highest closing price of the month. 2017-10-02 image1 The numbers across the board are fairly compelling. Trades may want to keep this in mind as we enter(...) Tactical Asset Allocation in September (Now Adjusted for Timing Luck) [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(...) Smart Portfolios from @InvestingIdiocy [Reading the Markets]Robert Carver, author of Systematic Trading, has turned his attention to the thorny problem of portfolio construction. In Smart Portfolios: A Practical Guide to Building and Maintaining Intelligent Investment Portfolios (Harriman House, 2017) he deals with such topics as how to blend assets with(...) Calibrating Financial Models using a Non-Parametric Technique [Top of The Bell Curve]Traditionally, asset returns have been modeled using diffusion processes. Diffusion processes assume that the sample path of the process being modeled is continuous. However, empirical evidence suggests that there are jumps that occur in asset returns, such as those that occurred during the(...) The Kelly Criterion — Does It Work? [QuantStrat TradeR]This post will be about implementing and investigating the running Kelly Criterion — that is, a constantly adjusted Kelly Criterion that changes as a strategy realizes returns. For those not familiar with the Kelly Criterion, it’s the idea of adjusting a bet size to maximize a strategy’s long(...) Are Short Out-of-the-Money Put Options Risky? Part 2: Dynamic Case [Relative Value Arbitrage]This post is the continuation of the previous one on the riskiness of OTM vs. ATM short put options and the effect of leverage on the risk measures. In this installment we’re going to perform similar studies with the only exception that from inception until maturity the short options are(...) VIX and Trend-Following, the Killer Combo? [Alpha Architect]Some things in life are naturally made for each other. Some examples include the following: Peanut Butter and Jelly Starsky & Hutch Value and Momentum So my ears perked up when the idea of combining VIX levels and Trend Following started making the rounds on finance twitter. Like any geek, I was(...) Craftsmanship Alpha [Quantpedia]Successful investing requires translating sound investment concepts into actual trading strategies. We study many of the implementation details that portfolio managers need to pay attention to; such choices range from portfolio construction to execution. While these kinds of decisions apply to any(...) What Kind of Asset Is Bitcoin? [CXO Advisory]Does Bitcoin behave like some other asset class? To investigate, we calculate daily and monthly return correlations between Bitcoin and each of 34 exchange-traded products encompassing eight used in “Simple Asset Class ETF Momentum Strategy ” (SACEMS), 24 considered in “SACEMS Portfolio-Asset(...) High Frequency Trading III: Optimal Execution [Quant Start]In this article series Imanol Pérez, a PhD researcher in Mathematics at Oxford University, and an expert guest contributor to QuantStart outlines the basics of high-frequency trading. In this article Imanol uses the theory of stochastic optimal control to optimally execute a large trade order. It(...) Calculate monthly returns…with Pandas [Quant Dare]Calculating returns on a price series is one of the most basic calculations in finance, but it can become a headache when we want to do aggregations for weeks, months, years, etc. In python the Pandas library makes this aggregation is very easy to do, but if we don’t pay attention we could still(...) Part 2: Evidence Based Investing is Dead. Long Live Evidence Based Investing! [Invest Resolve]Note: this is Part two of a two-part article series. Please see article one here. Michael Edesess’ article, The Trend that is Ruining Finance Research, makes the case that financial research is flawed. In this two-part article series, weexamine the points that Edesess raised in some detail. His(...) Quality Factor: Zero Alpha for Most Investors? [Factor Research]SUMMARY It’s difficult to rationalise why there should be excess returns from high quality stocks The Quality factor needs to be constructed beta-neutral to achieve positive returns Exposure to the Quality factor is an attractive hedge for an equity-centric portfolio INTRODUCTION The concept of(...) Addressing Low Return Forecasts in Retirement with Tactical Allocation [Flirting with Models]The current return expectations for core U.S. equities and bonds paint a grim picture for the success of the 4% rule in retirement portfolios. While varying the allocation to equities throughout the retirement horizon can provide better results, employing tactical strategies to systematically(...) Global Diversification Works for Multi-Factor Portfolios [Quantpedia]The benefits of country diversification are well established. This article shows that the same benefits extend to equity factors, such as value, size, momentum, investment, and profitability. Specifically, country factor portfolios reflect both common variation, which we define as the global factor,(...) Factor Timing Investigation: Interest Rates, Value Spreads, and Factor Premiums [Alpha Architect]Now that the Federal Reserve has begun the process of raising interest rates, and has announced their intention to begin to unwind their policy of quantitative easing (reducing the amount of bonds in their portfolio, either by selling holdings or allowing holdings to mature), investors may be(...) Downloading Historical Data Using Oanda's API and R [Dekalog Blog]It has been about 5 months since my last blog post and in this time I have been working away from home, been on summer holiday and spent some time mucking about on boats, so I have not been able to devote as much time to my blog as I would have liked. However, that has now changed, and this blog(...) Trinity Portfolio (Lite) from @MebFaber [Allocate Smartly]This is a test of the Trinity Portfolio from Meb Faber and Cambria Investments, so named for the three key elements of the strategy: (1) a globally diversified mix of assets, (2) a tilt towards the value and momentum factors, and (3) exposure to momentum and trend-following. We’ve titled our test(...) Seven Habits of Highly Ineffective Quants [CXO Advisory]Why don’t machines rule the financial world? In his September 2017 presentation entitled “The 7 Reasons Most Machine Learning Funds Fail”, Marcos Lopez de Prado explores causes of the high failure rate of quantitative finance firms, particularly those employing machine learning. He then(...) Option Chain Extraction For NSE Stocks Using Python [Quant Insti]We are back again with another post on Python. Our last post, “Basic Operations on Stock data using Python” was well received and we are glad to see the number of likes & shares for the post on various quant trading and Python forums. Keep them coming! Financial market data is a very(...) ETF Sector Trading: The effect of daily, weekly and monthly timeframes [Alvarez Quant Trading]I recently gave a presentation on Sector trading using the 200-day moving average at the Northwest Traders and Technical Analysts. Some questions asked were: What if we only trade this monthly? What if we used weekly bars to trade only weekly? Wat if we used weekly bars to trade monthly? The reason(...) SVM Trend Strategy on Nikkei 225 Mini Futures [Golden Compass]Motivation Support Vector Machines (SVM) are among the most popular Supervised Learning techniques for classification and regression, due to their ease in usage to find non-linear patterns. They work by separating data by finding an optimal threshold – known as a decision boundary or hyperplane,(...)