Volatility is one of the best known and most widely used concepts in finance. Given a price series of a financial instrument, its volatility is defined as the dispersion of the returns. This measure is used to compare securities in terms of risk. But in order to compare, sometimes it is necessary to

The fiscal stance of governments can be a powerful force in local fixed-income markets. On its own, an expansionary stance is seen as a headwind for long-duration or government bond positions due to increased debt issuance, greater default or inflation risk, and less need for monetary policy

We have published a new paper on the topic of rebalance timing luck in option strategies: The Hidden Cost in Costless Put-Spread Collars: Rebalance Timing Luck. Prior research and empirical investment results demonstrate that strategy performance can be highly sensitive to rebalance schedules, an

An extract from the chapter on pairs trading from my forthcoming book Equity Analytics

Growth stocks can be defined via valuations, fundamentals, or performance These stocks have generated essentially zero excess returns since 2005 Neither has the inverse basket (low valuations, low growth, low momentum) INTRODUCTION When Yale history professor Sherman Kent interviewed 23 NATO

Do Sector ETFs Outperform Treasury Bills? Gow-Cheng Huang (Tuskegee U.) and Kartono Liano (Mississippi State U.) June 2022 Unlike individual stocks, more than 67% of sector ETFs have lifetime buy-and-hold returns that are higher than the T-bill rates. Thus, the majority of sector ETFs outperform

The year 2022 was a difficult one for investors in traditional 60/40 portfolios, as equities all around the globe and bonds produced double-digit losses, a very rare event. Can factor strategies mitigate risk? That performance has heightened interest in the diversification benefits of factor-based

As you can probably tell by my other articles (for example here, here and here), I am a big fan of GARCH models. Forecasting conditional variance is arguably the best we can get in predicting stock returns out of themselves. Still, the GARCH family is no silver bullet that suddenly makes you a stock

When we first started publicly writing and talking about capital efficiency in 2017 – the predecessor conversation to return stackingTM – the 13-week U.S. Treasury Bill rate sat around 1.30%. The prototypical example at the time was a 1.5x levered 60% stock / 40% bond portfolio (also referred to

Surely everyone has suffered/enjoyed a sudden movement of a stock in a portfolio when the underlying company has reported earnings. Now that the earnings report season is starting you may wonder if there exists a way to avoid those shocks in the stocks without missing performance in your

Continuing the series of blog posts on diversification indicators, I describe in this post a correlation-based measure of portfolio diversification called the diversification ratio, initially introduced by Yves Choueffaty and Yves Coignard in their paper Toward maximum diversification1 and later

This article attempts to demystify the approach and methodology used to characterize the risk and return relationship in private equity today. The illiquid nature of the asset class makes the demystification of private equity returns difficult to achieve under any circumstances. Still, the framework

On Thursday afternoon I witnessed 3 different breadth thrust signals I watch all trigger on the same day. The signals, with link to learn more about them are: Walter Deemer’s Breakaway Momentum (BAM) signal Wayne Whaley’s Advance Decline Thrust (5) from his paper “Planes, Trains, and

Beta-neutral value, momentum, and low volatility factors are currently highly correlated to the S&P 500 The correlation is temporary rather than structural Likely explained by the downturn in tech stocks that benefits these factors INTRODUCTION We recently published our quarterly Factor Olympics

It is needless to say about next big thing in the field of artificial intelligence (AI) known as ChatGPT. ChatGPT is a large language model developed by OpenAI. It is based on the GPT (Generative Pre-training Transformer) architecture and is trained on a massive dataset of text data. This allows it

The Fed’s interest rate actions, which have been a topic of much discussion recently, can be very valuable information when making investment decisions. In particular, this post shows how to improve our sector allocation following the Fed’s announcements. Introduction The Federal Reserve System

The Hurst exponent is a statistical measure of long-term memory of time series. The existence and form of such memory are of great interest in financial markets, as financial returns are not generally governed by random walks. The Hurst exponent is a single scalar value that indicates if a time

In his 2011 presidential address to the American Finance Association, John Cochrane coined the term “zoo of factors,” reflecting concerns about the quality of financial research. How do you separate the signal from the noise? In our book “Your Complete Guide to Factor-Based Investing,”

The volatility of interest rates in 2022 has been indeed extreme. In Figure 1, I show the dependence the between the MOVE index (which measures the implied volatility of one-month options on UST bond futures and which is constructed similarly to the VIX index for implied volatilities of the S&P

Alternative credit funds aim to provide returns uncorrelated to traditional fixed income markets However, most of the performance can be explained by equities and plain-vanilla bonds All funds have lost money in the last 12 months, indicating that they are not alternative enough INTRODUCTION As

Russia’s economy was already in decline before the WW1 began, and its involvement in the conflict only exacerbated the situation. By 1917, russia was on the verge of collapse, with widespread poverty and a deep political divides. In March Tsar Nicholas II was forced to abdicate, and a provisional

We have already published a few articles about how the different market cycles affect the performance of your portfolio and performance of market factors. So far, these states of the market were identified in-sample, with the benefit of hindsight. The full methodology of how we defined bull/ bear

Happy new year. I didn't post very much in 2022, because I was in the process of writing a new book (out in April!). Save a few loose ends, my work on that project is pretty much done. Now I have some research topics I will be looking at this year, with the intention of returning to something

Would you rather choose a trading system that wins small amounts most of the time but when it loses, the loss is big? Or would you rather choose a trading system that loses small amounts most of the time but when it wins, the gain is big? In this blog post, we will examine such systems from the risk

Despite the widespread popularity of trend-following investing, little is known about optimal trend-following with transaction costs. A few existing studies consider this question using a continuous-time model within the stochastic optimal control theory framework. However, despite being

Introducing the first book ever generated by an artificial intelligence on the subject of using machine learning for quantitative trading: “From Data to Trade: A Quantitative Approach to Machine Learning”! This groundbreaking work offers a unique perspective on the use of machine learning in the

As per usual this point in time, I check my blog’s traffic-analytics to see which were the most popular pieces last year. Without further ado.. First: Correlation and Correlation Structure (6) – Distance Correlation (08:33 minutes average time on page) Second: Similarity and Dissimilarity

2022 is the best year for factor investing over the last decade Value generated the best and size the worst return in 2022 Despite the strong returns, investors remain cautious on factor investing INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10

In this article about asset pricing theory, we examine the research on the impact of technological advances that displace human labor in favor of machine capital to asset pricing. Automation and the displacement of labor by capita: Asset pricing theory and empirical evidence Jiˇrí Knesl Journal of

In the last article, we discussed one advantage of probabilistic forecasts over point forecasts - namely, handling time-to-exceedance problems. In this post, we will examine another limitation of point forecasts: Higher order statistical properties. The ideas will be very familiar to those with a

The relprice Index in the Performance Data table shows the price of the stock relative to the S&P 500 index over a specified period. Let’s look at the median relPrice for all stocks that are currently members of the S&P500 index, eliminating any for which the relevant Performance Data is

Generally speaking, one of the major attractions of working in the equities space is that the large number of available securities opens up a much wider range of opportunities for the quantitative researcher than for, say, futures markets. The focus in equities tends to be on portfolio strategies

There are two simple ways to enhance FX carry strategies with economic information. The first increases or reduces the carry signal depending on whether relevant economic indicators reinforce or contradict its direction. The output can be called “modified carry”. It is a gentle adjustment that

The past decade has seen a dramatic growth in sustainable investing—applying environmental, social and governance (ESG) criteria to investment strategies. Investments considered environmentally friendly are often referred to as “green,” while “brown” denotes the opposite. Important

We have already showed How to extend history of any asset, portfolio or strategy to a 100-year long history. We’ve done this by introducing Quantpedia’s Multi-Factor Regression Model, which aims to replicate any portfolio and recreate what its 100-year history would have looked like. The model

We kicked off a new series of go-to solutions for #Cryptocurrencies with #Python. Subscribe to our YouTube channel for regular updates!

Traditional measures of geopolitical risk have been primarily qualitative. In this article, the authors describe and analyze not just new, but novel measures including textual analysis of news and expert reports, novel econometric methods and machine learning applications for measuring geopolitical

The latest inversion of the Treasury yield curve has been a popular topic of conversation among market pundits and participants alike. In this blog, we explain what a curve inversion is, why it is important, and what (if any) bearing it has on bond prices going forward. The 2s10s Yield Curve The

“If we knew what it was we were doing, it would not be called research, would it?” – Albert Einstein December 2022. Reading Time: 10 Minutes. Author: Finominal RESEARCH COMPENDIUM 2022 In 2022, we published more than 50 research articles on a wide range of investing topics including CTA

Multi-factor, long-short portfolios have provided significant portfolio diversification benefits by adding unique sources of risks that have historically produced premiums that meet the criteria Andrew Berkin and I established in our book “Your Complete Guide to Factor-Based Investing”—the

In the previous article I wrote about using VIX / MOVE index ratio as an indicator for SPX returns. Here is the google sheet for your reference and experiments. The ratio itself is very stable - in fact 11 years ago I wrote that VIX = EXP(-1.84+1.06*LN(MOVE)) As you can see the relationship has held

In finance, the performance of an asset is often quantified by alpha (the excess returns above a benchmark return) and beta (the volatility or risk of the asset relative to a benchmark). These metrics are estimated from historical data and are often based on only short track records. Even if a long

What’s the performance of a balanced portfolio during rising rates? How does it behave when inflation is high? What about a combination of these market states? And how do trend-following strategies fare in such an environment? These and even more questions we will attempt to resolve in our

This article explains how to call the Alpha Vantage API to retrieve stock market data in a Python application using the Python alpha_vantage library and the Python requests module. The documentation for the Python alpha_vantage client library is limited. It isn’t easy to understand the mapping

I’ve heard people saying recently that the typical 2nd half of December bullish tendency is unlikely to unfold this year. The theories suggest that the market is often up on the year. And people and institutions flush with profits tend to push it higher as the New Year approaches. There is also

Pastor, Stambaugh, and Taylor (2015) and Zhu (2018) provide significant evidence of decreasing returns to scale (DRS) at both the fund and industry levels. The authors examine the robustness of their inferences after Adams, Hayunga, and Mansi (2021) critique the above two studies. What are the

This is a test of a novel trend-following strategy from the paper Optimal Trend Following Rules in Two-State Regime-Switching Models by Valeriy Zakamulin and Javier Giner. These results aren’t as eye catching as many we track, but the paper contributes some important ideas to the study of tactical

I recently asked on LinkedIn about advice and opinions on infrastructure for collecting, storing, processing, and storing back derived data (features, signals) for some simple mid freq / stat arb trading strategies. I did not expect to receive so much feedback about infrastructure for trading data

MOVE index (Merrill Lynch Option Volatility Estimate) was developed by Merrill Lynch to measure implied volatility of US Treasury markets. ML became a part of Bank of America in 2008, and then indexes were sold to ICE in 2019, so now the index is called "ICE BofAML MOVE Index" The index is

Which assets perform best when rates are rising, and inflation is high? And what happens if rates are still rising but inflation is already falling? And what’s the impact of the business cycle? These are the questions that everyone is currently trying to answer. Today, we will start a longer