One of the popular investing truisms is the following (inspired by Bill Sharpe): For somebody to beat the market (win) someone else has to lag the market (lose). This becomes an even more daunting (efficient market) statement when changed to the following: For someone to consistently beat the market

The Alpha Architect mission is to empower investors through education.(1) We can’t accomplish our mission without help. Fortunately, “finance twitter” and an explosion of bloggers are helping us achieve our goal. Awesome! Of course, with so many new blogs hitting the scene, we now face an

This post will introduce John Ehlers’s Autocorrelation Periodogram mechanism–a mechanism designed to dynamically find a lookback period. That is, the most common parameter optimized in backtests is the lookback period. Before beginning this post, I must give credit where it’s due, to one Mr.

Stocks usually perform poorly when inflation is on the rise. Using the inflation rate, we developed a market timer according to two simple rules. Switching according to the Timer signals between the S&P500 with dividends and a money-market fund would have provided from Aug-1953 to end of

Random forest is one of the most well-known ensemble methods and it came up as a substantial improvement of simple decision trees. In this post, we are going to explain how to build a random forest from simple decision trees and to test how they actually improve the original algorithm. Maybe you

A quantmod user asked an interesting question on StackOverflow: Looping viewFinancials from quantmod. Basically, they wanted to create a data.frame that contained financial statement data for several companies for several years. I answered their question, and thought others might find the function I

A recent theory paper from researchers at NYU and Rutgers attempts to explain the empirical evidence on stock serial correlation (e.g., short-term reversal, long-term stock reversal, and classic stock momentum). The interesting wrinkle with this paper is the authors don’t need to assume irrational

Based on our post from earlier today ("Anatomy of a Bull Market"), we received a request to decompose U.S. equity returns over rolling 10-year periods. The graph presenting this data is below. To perform these calculations, we calculate the annualized return generated by each source

The first talks from QuantCon 2017 have just been announced. Come out and hear insightful talks on overfitting, backtesting, Bayesian global optimization, and more! QuantCon Talks on April 29th Marcos López de Prado, Senior Managing Director at Guggenheim Partners, and Dr. Michael Kearns, Professor

I’m strongly considering entering into a substantial investment in bitcoin as part of my passively managed, fully long portfolio. Before I do that, I decided to look into two questions regarding bitcoin’s role in a portfolio: What is bitcoin’s correlation with other financial assets? Can

Long-term average stock returns smooth over the bull and bear markets that investors experience, and no two market cycles ever unfold the exact same way. Bull and bear markets can vary significantly in both duration and magnitude. But there are other characteristics of bull markets that can also

In this article the issue of when to retire a trading strategy will be considered. It will present brief reasons why strategies eventually end up underperforming. It will discuss how this can be measured over time and then describe an implementation in QSTrader that provides this functionality. The

This is the last week to snag yourself a free ticket to this year’s QuantCon in NYC in April. Quantopian has generously offered the Quantocracy community 3 free tickets worth a total of $2,497. A number of very smart people on our mashup will be speaking, including EP Chan, Rob Carver (Investment

The 200 day moving average is perhaps one of the most well-known tactical asset allocation filters and many analysts suggest that you should be long the stock market if the Index is greater than the 200 day MA, and flat the stock market if the Index is less than the 200 day MA. For example, the

This post will be a bit more technical than most, but it’s an important subject to understand. Today, let’s talk about rolling and back-adjusting futures prices: why we did it. How we do it, and what it means when we look at historical charts. Futures pricing First, a little quick background.

Liquid Alternative Mutual Funds versus Hedge Funds Jonathan S. Hartley (University of Pennsylvania) February 1, 2017 Despite the rapid rise of the number of liquid alternative mutual funds (LAMFs) available to retail investors in recent years, few studies have compared how their return and risk

One of the most common uses of optimization is to find the “best” values for a trading strategy, but is this approach only giving us part of the picture? Are there other uses for optimization that we can leverage to create better trading strategies? Today we’re going to have a quick chat with

The low-volatility anomaly is often attributed to limits to arbitrage, such as leverage, short-selling and benchmark constraints. One would therefore expect hedge funds, which are typically not hindered by these constraints, to be the smart money that is able to benefit from the anomaly. This paper

The vexing problem facing every system developer is the need to validate their backtest. One rigorous way to do that is to use walk forward optimization. However, an argument can be made that the alternative approach of taking all of the data into consideration can also make sense, and, in fact,

Most Tactical Asset Allocation (TAA) strategies have followed the same basic storyline. They keep pace with the market during the good times (like we find ourselves in right now), and shine during the bad times. To illustrate, the graphs below shows the average return of all of the TAA models that

Returning to Chat With Traders for a second time is David Bush—first on episode 23. David began as a discretionary trader, more than 20-years ago, but over time he’s developed into a quant trader. And he’s exceptionally good at what he does; David’s been the first place winner of two (real

Since the first article of this blog (Technical Analysis for intraday stocks trading? FORGET IT!), i’m pointing to the fact that there is a lot of cross correlation between stocks and between stocks and the future index. That’s not new to anyone and even those who are starting at the

This post is about a slightly obscure, but very important, issue. Should we use geometric or arithmetic means of returns to evaluate investments? This might seem boring, but answering this will help us with some other serious problems: Does diversification increase the expected value of your

The financial crisis of 2008 devastated portfolios far and wide and brought the global economy to the brink of collapse. It was a disaster, but there was at least one positive outcome from the debacle: a wider recognition that tail risk is a real and present danger that’s forever lurking. The

Diversification is a cornerstone of portfolio construction. It provides investors with the important ability to invest in the face of uncertainty. Because it can reduce risk without necessarily sacrificing potential reward, it is known as the only free lunch on Wall Street. Yet, we believe that many

One technique for optimizing systems is to create a regime filter. A most common example is a binary classifier that classifies the market into either bull or bear markets based on closing above or below the 200 day moving average. But, there are problems with binary classifiers and we will

One of the most widely used risk measures is the Value-at-Risk, defined as the expected loss on a portfolio at a specified confidence level. In other words, VaR is a percentile of a loss distribution. But despite its popularity VaR suffers from well-known limitations: its tendency to underestimate

Quantopian has generously offered the Quantocracy community 3 free tickets to this year’s QuantCon in NYC. Two of the tickets are for the QuantCon main event on 04/29 ($699 value), and one deluxe ticket includes both the main event and a full day of workshops ($1,099 value). A number of very smart

I’m excited to be sharing this one with you today for a number of reasons. Firstly, I’ve been trying to get this guest on the show for over a year now, in fact it’s been longer than that because we first got in touch in July 2015, so it’s been a long time in the making. But secondly, and

This is the first in a series of posts in which we will change gears slightly and take a look at some of the fundamentals of algorithmic trading. So far, Robot Wealth has focused on machine learning and quantitative trading research, but I had several conversations recently that motivated me to

Using data for five major stock market declines during the 1987-2008 period, this paper provides evidence that value stocks are generally less sensitive to major stock market declines than growth stocks, controlling for beta, firm size, and industry group. Further analysis using several hundred

Albert Einstein is reported to have said the following: The more I learn, the more I realize how much I don’t know. I can relate. Having studied finance for a long time (PhD, professor, books, articles, etc.), I think I now know less about how the stock market works. In fact, I probably should

I. Trading Strategy Developer: John Ehlers and Ric Way. Source: Ehlers, J., Way, R. (2010). Zero Lag (well, almost). Concept: Trend following trading strategy based on moving average filters. Research Goal: To verify performance of the Zero Lag Moving Average (ZLMA). Specification: Table 1. Results:

January 2017 Trend Following: DOWN -2.84% If December bucked the trend of the last 6 months, January was a continuation of the downward direction seen in the second half of 2016. The index starts 2017 with a negative performance, in the context of global uncertainty, and keeps flirting with the

Yesterday I discussed two swing-trade systems that work pretty well in out-of-sample data. While each works differently, they overlap enough that you don’t get any benefit from running them both at the same time. One great thing about these two systems is that they’re dead simple to manage.

Trend Following started the year with the same flavour as it ended 2016: down. The index posted a negative performance in January but is still slightly up since the low in October last year. Please check below for more details. Detailed Results The figures for the month are: January return: -3.32%

I have created a quantitative trading strategy that incorporates a simple machine learning model to trade SPY as part of my ongoing research in quantitative trading. The focus here was not on creating a strategy with alpha but rather to develop a framework both in my mind and in code to develop more

The narrative of Smart Beta products is that factors are becoming an investment commodity. Factors are not commodities, but unique expressions of investment themes. One Value strategy can be very different from another, and can lead to very different results. There are many places that factor

The QuantStart team are very happy to announce that the full version of Advanced Algorithmic Trading has now been released. This brings the total number of pages to 517. To access the full version customers simply need to follow the download link received in the original pre-order purchase email. If

The fastest way to test the profitability of a trading model generating signals is to do a simple backtest (which means no hindsight biases i.e at least 1 period of timeframe lag from signal even if you timeframe is in milliseconds) using historical time series. actual returns = absolute return (no

Well, I was midway through a formal book review on Larry and Andrew’s new book, “Your Complete Guide to Factor-Based Investing,” when I noticed that the team over at GestaltU already wrote the review I was going to write — great job and I encourage everyone to read it. larry factor book So

This is a summary of the January performance of a number 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

Recently, I have been interested in applying machine learning to trading. This post contains some of my thoughts regarding a framework for thinking about trading as a machine learning problem, treating trading as a classification or regression problem, and transforming the output of a machine

How can we predict future returns of a series? Many series contain enough information in their own past data to predict the next value, but how much information is useable and which data points are the best for the prediction? Is it enough to use only the most recent data points? How much

One of the side projects I worked on in the past handful of months was Mr. Market Feels: a stock market sentiment Twitter bot that used automated image processing to extract and tweet the value of CNN Money’s Fear and Greed Index every day. Motivation There have been attempts to backtest the

In previous blog posts, we explored the possibility of using various volatility indices in designing market timing systems for trading VIX-related ETFs. The system logic relies mostly on the persistent risk premia in the options market. Recall that there are 3 major types of risk premium:

In the past few years “smart beta” (also known as “alternative beta” or “strategic beta”) investments have grown rapidly in popularity. As of the current date (January 2017), assets in these investment categories have grown to over USD$500 billion, and are expected to reach USD$1

2016 was a rather boring investment year that turned out surprisingly profitable if you used the strategies that worked. I missed the boat I largely missed the best strategies boat as my portfolio was over 60% in cash throughout the year. In spite of that I still I was still able to earn a

Ah…leveraged ETFs. All that beta without all the embarrassment of trying to borrow money from your broker (or cousin) to leverage your returns. Is the regular ETF not volatile enough for you? Buy the 2x version! Still too tepid? Perhaps the 3x version is what you’re looking for. Unless you’re

This post contains some of the research I have done regarding how to measure the performance of a trading strategy. The immediate goal of conducting this research is to build out a collection of performance measure tools in R to evaluate, compare, and measure the performance of trading strategies.