Quant Mashup A Primer on Grid Trading Strategy [Quantpedia]Grid trading is an automated currency trading strategy where an investor creates a so-called “price grid”. The basic idea of the strategy is to repeatedly buy at the pre-specified price and then wait for the price to rise above that level and then sell the position (and vice versa with shorting(...) Classifying market regimes [SR SV]Market regimes are clusters of persistent market conditions. They affect the relevance of investment factors and the success of trading strategies. The practical challenge is to detect market regime changes quickly and to backtest methods that may do the job. Machine learning offers a range of(...) January Effect on Stocks [Alvarez Quant Trading]A member of The Crew recently asked me about the January Effect and if had I done any research on it. I had not. I have tested the December effect, which is buying the worst stocks of the year on December 1st, Should You Buy the Best or Worst YTD Stocks. From Investopedia, ‘The January Effect is a(...) Our Top 5 Geeky Finance Posts for 2021 [Alpha Architect]We are calling it quits for the holidays. Most of us have kids and Santa is coming to town! We’ll talk about research and educate investors next week. Here are the Top 5 content pieces this year (Based on traffic): Even God would get fired as an Active Investor Does Gamma Hedging Actually Affect(...) Research Review | 23 December 2021 | ETFs [Capital Spectator]Trading Down: The Effects of Active Trading on One-Month ETF Returns Ian Gray (Loyola Marymount University) December 15, 2021 Ark Investment Management (ARK), led by CIO Cathie Wood, has risen to prominence over the past few years because of its remarkable performance. Because of requirements for(...) Value investing: What history says about five-year periods after valuation peaks [Alpha Architect]No matter how you slice it, Value stocks are historically cheap compared to the past. There have been numerous articles on this topic, such as Ryan’s post here, Larry Swedroe’s post here, and more recently, Cliff Asness’ post here. Cliff’s post is one picture, shown below. 1 Source:(...) ‘Twas 3 Nights Before Christmas: Updated NASDAQ Version [Quantifiable Edges]I’ve posted and updated the “Twas 3 Nights Before Christmas” study on the blog here several times since 2008. The study will kick in at the close today (12/21). This year I will again show the Nasdaq version of the study. While all the major indices have performed well during this period, the(...) When the Close Is Not Really the Close (A Geeky Discussion) [Allocate Smartly]This post covers an issue rarely discussed in backtesting: the day’s last real-time price shown at 4pm ET often differs slightly from the day’s official closing price determined shortly after 4pm. This is not an Allocate Smartly issue; it’s an oddity of the exchanges. Every so often this(...) The Relationship Between the Value Premium and Interest Rates [Alpha Architect]Value stocks sharply underperformed growth stocks from 2017 to 2020, exacerbating a longer period of lackluster performance dating back to the Global Financial Crisis. The Death of Systemic Value Investing is not new news for frequent readers of the blog nor are the possible pathways to Resurrecting(...) Causal inference as a tool for publishing robust results [Alex Chinco]Imagine you’re an asset-pricing researcher. You’ve just thought up a new variable, X, that might predict the cross-section of returns. And you’ve regressed returns on X in a market environment e of your choosing (i.e., using data on some specific time period, country, asset class, set of test(...) Trading a Complete Starter System Live with @AlpacaHQ [Raposa Trade]We’ve spent the past few posts building up the Starter System laid out in Rob Carver’s book, Leveraged Trading. We’ve gone from a simple moving average cross-over model, to a volatility targeting system with multiple instruments and time frames that dynamically sizes and re-positions your(...) Yet Another Improved RSI [Financial Hacker]John Ehlers strikes again. The TASC January 2022 issue features another indicator supposedly improved with Hann windowing – the RSIH, a RSI with Hann flavour. Can it beat the standard RSI? The RSI is basically the normalized difference of price up/down movements. And its here presented Hann(...) Self-organizing maps for clustering [Quant Dare]We can use self-organizing maps for clustering data, trained in an unsupervised way. Let’s see how. This week we are going back to basics, as we will see one of the first successfully deployed machine learning algorithms: self-organizing maps (SOM, sometimes also called Kohonen maps). This is an(...) A Stab at Fiction (Unrelated to Quant, but we support our friends) [Following the Trend]When I wrote my first book a decade ago, I didn’t expect it to get much attention, or sales. I was in the wrong country, of the wrong nationality, I had shunned social media and was nearly invisible on the internet. On top of these obstacles, I tried out a whole new style of writing trading books.(...) Estimating Rebalancing Premium in Cryptocurrencies [Quantpedia]A long time ago, before elevators were a thing, a simple mechanism was used to get the miners in and out of the mines. This mechanism is called a “Man Engine” (or “Fahrkünst” in German language) and works on a simple principle of two reciprocating ladders and stationary platforms. The two(...) An Important Test for the Global Growth Cycle [Grzegorz Link]Whatever kind of strategy you're employing as an investor, an invaluable tool for determining it's usefulness is testing. Not simply backtesting on historical data or stress testing on synthetic data – that's the easy part. The fun and playful part. A much more important test comes(...) Quantitative Analysis of a Sample Drawn from the Unknown Continuous Population [Quant at Risk]In quantitative finance, we very often deal with a sample mean and sample standard deviation being derived given a vector or a time-series or any other (1-dimensional) dataset. For many of us these calculations are so obvious that only a few understand the principles standing behind the scene.(...) ETFs for Rising Interest Rates [Factor Research]A wide range of strategies are marketed as beneficiaries of rising interest rates Portfolios are comprised of equities, bonds, options, long as well as short positions However, only financial services companies and short bonds offer a positive correlation to interest rates INTRODUCTION In this year,(...) Back to basics: PCA on stocks returns [Gautier Marti]A short code snippet to apply PCA on stocks returns. No secret sauce is used here to clean the empirical covariance matrix. This blog post will mostly serve as a basis for comparing several flavours of PCA and their impact on ex-ante volatility estimation. We may look in future blog posts into(...) The risk-reversal premium [SR SV]The risk reversal premium manifests as an overpricing of out-of-the-money put options relative to out-of-the-money call options with equal expiration dates. The premium apparently arises from equity investors’ demand for downside protection, while most market participants are prohibited from(...) Synthetic Lending Rates Predict Subsequent Market Return [Quantpedia]It is indisputable that the data are changing financial markets – computing power has increased, allowing to rise the trends of ML/AI and big data (number of possible predictors or granularity) or HFT strategies. Indeed, not all the datasets are worth the time of academics, investors or traders,(...) New Site: Financial market data analysis with pandas (h/t @PyQuantNews) [Wrighters.io]Pandas is a great tool for time series analysis of financial market data. Because pandas DataFrames and Series work well with a date/time based index, they can be used effectively to analyze historical data. By financial market data, I mean data like historical price information on a publicly traded(...) US Market Valuations: Looking down the Abyss! [Nava Capital]“Value investing is at its core the marriage of a contrarian streak and a calculator.” S. Klarman “The first principle is that you must not fool yourself, and you are the easier person to fool.” R. Feynman In this brief note, our goal is to show readers, as objectively as possible, the(...) Stock Market Returns and Volatility [Factor Research]Average stock market returns are similar regardless if volatility was high or low However, given skewed returns, it was not attractive investing when volatility was high Unfortunately implementing a strategy to avoid high volatility periods is emotionally challenging INTRODUCTION Active fund(...) You Thought P-Hacking was Bad? Let's talk about "Non-Standard Errors" [Alpha Architect]Most readers are familiar with p-hacking and the so-called replication crisis in financial research (see here, here, and here for differing views). Some claim that these research challenges are driven by a desire to find ‘positive’ results in the data because these results get published, whereas(...) Book Review: Advanced Portfolio Mgmt - A Quant's Guide for Fundamental Investors [Gautier Marti]Great book, I absolutely recommend. Precise and concise (less than 200 pages). This book will especially be useful to grads or analysts in the early stages of their career. A junior analyst/quant/data scientist who masters the content of this book will definitely be useful in a pod of fundamental(...) Market data, investor surveys, and lab experiments [Alex Chinco]An asset-pricing model is a claim about which optimization problem people are solving when they choose their investment portfolios. One way to make such a claim testable is to derive a condition that should hold if people were actually solving this optimization problem. And the standard approach to(...) Size, Value, Profitability, and Investment Factors in International Stocks [Alpha Architect]The current workhorse asset pricing model is the Fama-French five-factor model (2015), which added the profitability and investment factors to their original (1992) three factors of market beta, size, and value—increasing the model’s explanatory power. Nusret Cakici and Adam Zaremba contribute(...) My trading system [Investment Idiocy]I realise that I've never actually sat down and described my fully automated futures trading system in all it's detail; despite having runit for around 7.5 years now. That isn't because I want to keep it a secret - far from it! I've blogged or written books about all the various(...) Volatilities and Correlations of Cross Rates, a Geometrical Understanding [Quant Dare]In this post we will show how the properties of a triangle can be used to intuitively obtain insights about the volatilities and correlations of currency pairs. Once the dominant branch of mathematics, geometry plays now a secondary role. However, its graphical arguments still seem to be better(...) A Complete Starter System for New Traders: Trading Multiple Instruments [Raposa Trade]Systematically trading a single instrument can be a bit dull. There are times when your chosen stock isn’t trending or doing much. So your system just sits there and waits…and waits..and waits. Obviously we don’t want to trade just to trade – that’s a good way to start losing money. But if(...) Can Prospect Theory Explain the Value and Momentum Factors? [Alpha Architect]Traditional finance academics lean towards risk-based models to explain why various return characteristics, such as value and momentum, predict returns. But there is another school of thought often referred to as ‘behavioral finance.’ This field has some of its own ideas (see below) on why(...) Trading the Inflation Theme [Light Finance]While the holiday season has long been regarded as a time of excess, folks this year are bracing for another challenge besides annual waistline expansion: price inflation. As we gather with family and friends for the holidays in coming weeks many are predicting that this year’s turkey will be the(...) Building a Long-Term Equity Portfolio [Factor Research]With a long-term time horizon, investors should consider alternatives to the market-cap weighted equity indices A valuation-based approach for creating an equities portfolio may seem more sensible Using EBITDA / EV yield seems to avoid some of the quality issues of other value metrics INTRODUCTION(...) Should We Never Invest in Individual Stocks? [Alpha Architect]Hendrik Bessembinder published a fascinating paper, which finds that nearly all publicly traded stocks in the U.S. — if held as buy and hold investments — underperform Treasury bills. This finding is incredibly surprising and interesting. Of course, when bold claims are made, they tend to(...) Action After Strong Friday Selloffs [Quantifiable Edges]Today’s study is one of several that will be appearing in the Quantifiable Edges Subscriber Letter in a few hours. Quantifiable Edges Black Friday sale has been extended through Cyber-Monday. Act now to take advantage. After Monday – its gone. Black Friday was a tough one for the market, with(...) Research Review | 26 November 2021 | Bitcoin and Crypto [Capital Spectator]We present a theoretical and empirical methodology that reflects the Cryptocurrency version of VIX, which we name it as CVIX (Crypto VIX), and captures the future 30 days forward Crypto risk (fear). Our framework is built on idiosyncratic and systematic Crypto risk, and is not based on the option(...) How to construct a bond volatility index and extract market information [SR SV]Volatility indices, based upon the methodology of the Cboe volatility index (VIX), serve as measures of near-term market uncertainty across asset classes. They are constructed from out-of-the-money put and call premia using variance swap pricing. Volatility indices for fixed income markets are of(...) Live Algo Trading on the Cloud - AWS [Algo Trading 101]Table of contents: What does live algorithmic trading on the Cloud mean? What are the pros and cons of deploying your trading strategies to the Cloud? What is the Cloud Service? What is Cloud used for? What cloud providers are good? What are Amazon Web Services (AWS)? Why should I use AWS? Why(...) Transformers: is attention all we need in finance? Part I [Quant Dare]In recent years we’ve seen an increase in the accuracy of NLP models through the use of Transformers. These models rely on the attention mechanism to identify key features but, how do they work? And most importantly, can we somehow use them in finance? Transformers The transformer is a relatively(...) The Value of the Value Factor: Cheaper now than a year ago? [Alpha Architect]About a year and a half ago, after one of the worst relative drawdowns the value factor has ever seen, I wrote a piece showing the value factor was cheap relative to history. Since then, value strategies are on a solid run (look at pretty much any type of value strategy and I think you’d agree).(...) A Consolidation After A New $SPY High [Quantifiable Edges]The range over the last week has been very tight. Every SPY close in the 5 days since 11/16 has been within the intraday range of that 11/16/21 bar. It is said that consolidations are often resolved in the direction of the trend. This guideline suggests that we’re more likely to see another leg up(...) Enhancing Portfolio Income With the Equity Volatility Premium [Simplify]With more than 118 million Americans in or nearing retirement (age 50 or older)[1], income has become a key component for many portfolios. But as asset allocators reach for yield in a low-rate environment, they must be extra mindful of the additional risks they may be accepting. In this blog we(...) Musing about S&P 500 Valuations [Factor Research]The valuation of the S&P 500 depends on portfolio construction Analyst EPS projections are likely overly optimistic PEG ratios of other stock markets are more attractive INTRODUCTION Striking a bargain seems to bring joy to all people, regardless of their location and their beliefs. It is almost(...) The Quant Cycle - The Time Variation in Factor Returns [Quantpedia]Although the factors in asset pricing models offer a premium in the long run, they are undergoing bull and bear market cycles in the short term. One would expect that it is due to their connection to the business cycles as the factor premium represents a reward for bearing the macroeconomic risks. A(...) Mr Greedy and the Tale of the Minimum Tracking Error Variance - Part two [Investment Idiocy]My last blog post was about a new method for a daily dynamic optimisation of portfolios with limited capital, to allow them to trade large numbers of instruments. (Although I normally write my blog posts to be self contained, you'll definitely have to read the previous one for this to make any(...) Community Alpha of @QuantConnect – Part 4 [Quantpedia]This blog post is the continuation (and finale) of series about Quantconnect’s AlphaMarket strategies. This part is related to the multi-factor strategies notoriously known from the majority of asset classes. We continue in the examination of factor strategies built on top of social trading(...) Another Look At Thanksgiving Week [Quantifiable Edges]The time around Thanksgiving has shown some strong tendencies – both bullish and bearish. I have discussed them a number of times over the years. In the updated table below I show SPX performance results based on the day of the week around Thanksgiving. The bottom row is the Monday of Thanksgiving(...) Chasing Low Beta Loses Alpha [Alpha Architect]One of the big problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicts a positive relationship between risk and return. However, empirical studies have found the actual relationship to be basically flat, or even negative. Over the last 50(...) Diving Deeper: Does the Day of the Month Matter? [Allocate Smartly]Most Tactical Asset Allocation (TAA) strategies trade just once a month. Backtests of those strategies usually assume trades are executed on the last trading day of the month. Why? Monthly asset data is often available further back into history than daily data. Assuming trades are executed at(...)