Quant Mashup A Complete Starter System: Trading with a Forecast [Raposa Trade]Let’s talk about insider trading. In an imaginary world where you know with certainty that the price of a stock will change on a given date – you can place a huge investment for enormous gains. Why wouldn’t you? There is no risk of the trade going bad because you have complete certainty in(...) How to Combine Different Momentum Strategies [Quantpedia]Today we will again talk more about the portfolio management theory, and we will focus on techniques for combining quantitative strategies into one multi-strategy portfolio. So, let’s imagine we already have a set of profitable investment strategies, and we need to combine them. The goal of such(...) Inflation-Themed ETFs: As Complicated as Inflation [Factor Research]Given the importance of inflation as a topic, there are surprisingly few inflation-themed ETFs The few available pursue differentiated strategies that result in heterogeneous portfolios The correlation of these ETFs to inflation has been relatively low INTRODUCTION Creating an investment framework(...) Top2Vec: Distributed Representations of Topics [Gautier Marti]Latent Dirichlet Allocation and Probabilistic Latent Semantic Analysis were the most widely used methods for topic modeling for the past 20 years. However, they rely on heavy pre-processing of the text content (custom stop-word lists, stemming, and lemmatization), and require the number of topics to(...) Fundamental value strategies [SR SV]Value opportunities arise when market prices deviate from contracts’ present values of all associated entitlements or obligations. However, this theoretical concept is difficult and expensive to apply. Instead, simple valuation ratios, such as real interest rates or equity earnings yields with(...) Pairs Trading An Advanced Strategy: CAD - Crude Oil [Milton FMR]Now before we dive into testing a strategy we must first define what makes a good pair to test in the first place. This is a question that has not one answer but several depending on the approach you want to take. We will discuss some of the possibilities and the weapons of choice if you want to(...) Factor Investing Deep Dive with Jack Vogel [Alpha Architect]Ben and Cameron, which host the excellent Rational Reminder podcast, sit down with Jack Vogel and go through a laundry list of factor investing questions. The topics discussed: 0:27 Do long-only factor premiums survive transaction costs? 2:28 Would the market impact of rebalancing a fund like MTUM(...) How News Move Markets? [Quantpedia]Nobody would argue that nowadays, we live in an information-rich society – the amount of available information (data) is constantly rising, and news is becoming more accessible and frequent. It is indisputable that this evolvement has also affected financial markets. Machine learning algorithms(...) Reddit for Fun and Profit (part 2) [Alpha Scientist]In the prior post Tracking Posts on WallStreetBets - Part I, we demonstrated how relatively easy it is to extract reddit activities related to a given stock ticker - in their raw form. If you haven't already read that post, you may want to take a moment to skim that article. In this post, we(...) Portfolio Diversification Via Hierarchical Clustering [Machine Learning Applied]In this article, we cluster stock price time series with hierarchical clustering and Euclidean, correlation, and Jensen-Shannon distances to answer two questions regarding portfolio diversification. How diversified is a given portfolio? How can a diversified portfolio be constructed? Procedure For(...) The Vanishing Illiquidity Premium [Alpha Architect]Liquidity—the ability to buy and sell significant quantities of a given asset quickly, at low cost, and without a major price concession—is valuable to investors. Therefore, they demand a premium as compensation for the greater risks and costs of investing in less-liquid securities. For example,(...) Webinar: Considerations For Combining Models [Quantifiable Edges]Date and time: Thursday 11/11/2021 at 4:15pm EST & Saturday 11/13/2021 at 11:00am EST Duration: 30-40 minutes + Q&A At Capital Advisors 360, I manage some composite portfolios that include several different models I have developed over the years. Using a couple of the models I trade as(...) Rolling Returns for the SP-500 [Alvarez Quant Trading]I just got back from a long vacation in Iceland (highly recommend visiting). As usual, when people discover what I do, they ask me about the markets. Several people were worried that the markets are too high. Then I read that the 20-year return of the SPX from 2001 to 2020 was way below the average(...) How Crazy is the Current Market? Not that Crazy. [Alpha Architect]Eric Balchunas had a recent tweet that I found fascinating. Eric’s tweet merely captures the tip of the iceberg with respect to the current market environment, which certainly feels “bubbly.” 1 The gist of the tweet is that $META, which is an ETF from our friends over at Roundhill Investments,(...) Understanding Equities Data [Quant Start]In this brief tutorial we will take a look at the different aspects of end-of-day equities data. We will develop an understanding of what the Open, High, Low and Close (OHLC) prices mean, as well as discuss the traded Volume. We will look at how a typical Adjusted Close price is calculated and the(...) The Mirage of Direct Indexing [Factor Research]Direct indexing is one of the growth areas in the asset management industry However, direct indexing represents active management, specifically an inferior approach to it Given the poor track record of active management, most investors should avoid pursuing this INTRODUCTION Direct indexing is hot.(...) A Complete System for New Traders: Trading without a Stop Loss [Raposa Trade]Risk control is absolutely crucial for traders. The first rule of trading is to stay in the game. The humble stop loss is the bread and butter for traders trying to control their risk. But what if I told you the stop loss wasn’t needed? What if you could control your risk while also increasing(...) US Funds Have Surprisingly Large International Exposure [Alpha Architect]Did you know that the percentage of foreign sales of the FTSE 100 is 76% and 43% for the SP500? This study investigates the power of indirect international exposure, that is international exposure through holdings of domestic stocks. The authors ask the following: What is the indirect international(...) The Longest Winning Streak for Bitcoin [Quant at Risk]In the previous article Estimating Probability of Bitcoin Pullback in its Bullish Market we touched an interesting point worth exploring a bit further. Namely, the probability of Bitcoin close-price closing each day higher than a day ago days in a row. We had seen that in July 2021 Bitcoin moved and(...) New Site: Portfolio Diversification Via K-means [Machine Learning Applied]We use the K-means algorithm to answer two questions regarding portfolio diversification. How diversified is a given portfolio? How can a diversified portfolio be constructed? Additionally, we use the multidimensional scaling (MDS) algorithm to visualize results. Procedure Take the last 120 days of(...) Using Machine Learning to Predict Options Returns [Alpha Architect]Though classical option pricing models assume that options are redundant assets, more recent research rejects this idea. However, research on cross-sectional predictors of option returns is relatively scarce and not very well understood. Contrarily, extensive literature examines cross-sectional(...) The brave new world of probability and statistics [Mathematical Investor]Today, arguably more than ever before, the world is governed by the science of probability and statistics. “Big data” is now the norm in scientific research, with terabytes of data streaming into research centers from satellites and experimental facilities, analyzed by supercomputers. “Data(...) One-N against the world! [OSM]We’re taking a short break from neural networks to return to portfolio optimization. Our last posts in the portfolio series discussed risk-constrained optimization. Before that we examined satisificing vs. mean-variance optimization (MVO). In our last post on that topic, we simulated 1,000(...) Reddit for Fun and Profit [part 1] [Alpha Scientist]The news story in 2021 that captured the complete attention of the financial press was the Gamestop / WallStreetBets / RoaringKitty episode of late January. A group of presumably small, retail traders banded together on Reddit's r/wallstreetbets forum to drive the price of $GME, $AMC and other(...) What Is Machine Learning? [Enjine]I’m South Korean by birth, but I spent most of my highschool years in Ireland. I wanted to remain in an English speaking country after I graduated, so I chose to go to the University of Waterloo, located in Canada. During the first lecture I attended, I needed to edit something I wrote. I rummaged(...) Hong Kong Machine Learning Meetup [Gautier Marti]When? Wednesday, October 27, 2021 from 7:00 PM to 9:00 PM (Hong Kong Time) Where? At your home, on zoom. All meetups will be online as long as this COVID-19 crisis is not over. The page of the event on Meetup: HKML S4E2 Programme: Talk 1: Systematic Pricing and Trading of Municipal Bonds Petter N.(...) A Complete System for New Traders: Adding Entry Signals [Raposa Trade]If you’re new to trading, it may be challenging to know how to get started. There are so many new terms, maths, and concepts, it can seem overwhelming! Now you have to take all that stuff and figure out how to make a profitable system out of it? Most people give up at this point. To address this,(...) Short-Term Momentum in Stocks, Commodities, and Cryptos [Factor Research]Developed markets have evolved from momentum to mean-reversion markets Other markets like EM or cryptos are momentum-dominated Likely explained by the distribution of retail vs institutional investors INTRODUCTION Markets evolve constantly, but they rarely change structurally. When they do, it is(...) An Introduction to Value at Risk Methodologies [Quantpedia]Understanding the risks of any quantitative trading strategy is one of the pillars of successful portfolio management. Of course, we can hope for good future performance, but to survive market whipsaws, we must have tools for sound risk management. The “Value at Risk” measure is such a standard(...) Czekanowski Index-Based Similarity as Alternative Correlation Measure [Quant at Risk]In quantitative finance we are used to measuring direct linear correlations or non-linear cross-bicorrelations among various time-series. For the former, by default, one adopts the calculation of Pearson product-moment correlation coefficients to quantify a linear relationship between two vectors.(...) Realized Volatility In Bitcoin Index [Lucas Miranda]One of the most relevant characteristics of digital assets is the high volatility observed in their prices. In this context, it is necessary that we have an adequate estimate of this parameter. In addition, there is great value in models that seek to predict future asset volatility values, which can(...) Will the Fed ruin my S&P500 investments? [Quant Dare]It is widely known that each time the Fed gives an announcement, the whole investing world is watching. So, one may wonder if those events can ruin their investments. Recently in this blog, we have studied a set of variables which might move the market. From this post one can extract that Fed(...) Do factors have a role in asset allocation? [Alpha Architect]What is the role of factors in asset allocation? Should investors substitute factor exposures for asset classes in constructing strategic portfolios? Or should factors be used as an instrument to enhance the performance of asset class-based allocation schemes? There are still quite a few questions(...) Pairs Trading Based on Renko and Kagi Models [Hudson and Thames]A group of strategies, named statistical arbitrage or pairs trading strategies are well-known for being market-neutral gained their popularity among institutional and individual investors. In general, to develop a pairs trading strategy, one needs to figure out two aspects, the first is how to(...) Does the Equity Market Lead the Currency Market? [Factor Research]Past equity market returns seem to predict currency returns Such a currency timing strategy may be interesting as a diversifier However, it is difficult to rationalize the results INTRODUCTION Bloomberg TV at 08:30 am EST: “The S&P 500 futures are trading lower as the US Dollar depreciated(...) A Complete Starter System for New Traders [Raposa Trade]Your biggest investment just took another move higher. It has gotten to the point that you start thinking about taking some profit off the table: it’s looking more and more enticing by the day! Do you do it? If you’re like most investors, you can’t resist taking some money today, even if it(...) New Site: Is the diversification ratio time-varying? [Lucas Miranda]Today we are going to check whether the diversification index proposed by Choueifaty and Coignard (2008) varies over time and some characteristics of this index. The construction of this analysis will be done using python. The Bovespa Index is the main stock index in the Brazilian market and is(...) A History of Wealth Creation in the U.S. Equity Markets [Alpha Architect]Hendrik Bessembinder contributes to the literature on the returns to public equity investment diversification benefits with his study “Wealth Creation in the US Public Stock Markets 1926-2019,” published in the April 2021 issue of The Journal of Investing. The study updated his 2018 paper, “Do(...) A New parameterization of Correlation Matrices [Eran Raviv]In volatility modelling, a typical challenge is to keep the covariance matrix estimate valid, meaning (1) symmetric and (2) positive semi definite*. A new paper published in Econometrica (citing from the paper) “introduces a novel parametrization of the correlation matrix. The reparametrization(...) Building a Raspberry Pi Cluster for QSTrader using SLURM - Part 1 [Quant Start]When carrying out systematic trading strategy research one of the main steps is to optimise a collection of strategy parameters to maximise or minimise some objective function. A simple example would be optimising the lookback parameters of the 'fast' and 'slow' moving averages(...) Break into Finance: New Podcast from Quant at Risk [Quant at Risk]Let me kick off the series of QuantAtRisk’s podcasts Break into Finance. I address it to all of you who wish to join the financial industry but have no clue how to do it as well as to those of you who would like to make a change, improve your career, get better, and succeed within the industry.(...) Markov chain as market predictor [Quant Dare]Markov chains are well-known in the world of both mathematics and finance. It is common to describe the market as a group of states, for instance bull and bear. From these two there are different ways to create a great deal of other states. If you want to establish the transition relationship(...) Deep neural networks, gradient-boosted trees, random forests: Statistical arbitrage on S&P 500 [Enjine]Although Harry Potter’s world of magic exists on the same earth as our magic-less “Muggle” world, the worlds might as well be on different planets. Each world is governed by its own sets of rules and values, and their residents hardly ever cross each others’ paths. Academia and industry(...) New Site: Options Derived Analytics [Newmark Risk]The Put-Call ratio is often the most commonly used Options-Implied Indicator due to it's simplicity in calculation. However there exists several variations in methodology to calculate it. In this blogpost we give an overview of these different methods and their relevance. The Put-Call ratio can(...) Beyond Hierarchical Risk Parity: Hierarchical Clustering-Based Risk Parity [Portfolio Optimizer]In a previous post, I introduced the Hierarchical Risk Parity portfolio optimization algorithm1. In this post, I will present one of its variations, called Hierarchical Clustering-Based Risk Parity, first described in Papenbrock2 and then generalized in Raffinot34 and in Lohre et al.5, from which(...) Pairs Trading with Markov Regime-Switching Model [Hudson and Thames]Traditional pairs trading strategies are prone to failures when fundamental or economic reasons cause a structural break and the pair of assets that were expected to move together are no longer having a strong relationship. Such a break may result in asset price spread having abnormally high(...) Long Volatility Strategies: Hedge Funds vs DIY [Factor Research]Long volatility exposure is typically achieved via hedge funds A simple DIY strategy would have generated similar attractive diversification benefits Most of the returns are explained by risk-off currencies, government bonds, and gold INTRODUCTION Do-it-yourself is the best and worst financial(...) Measuring the value-added of algorithmic trading strategies [SR SV]Standard performance statistics are insufficient and potentially misleading for evaluating algorithmic trading strategies. Metrics based on prediction errors mistakenly assume that all errors matter equally. Metrics based on classification accuracy disregard the magnitudes of errors. And traditional(...) Meb's Greatest Hits [Meb Faber]We’ve been publishing papers, books and blog posts for over 15 years covering everything from asset allocation strategies and global value investing, to farmland investing, to startups, and even the question of whether or not institutions and endowments should just be managed by a robot. With(...) What is the Optimal Gold Allocation in a Portfolio? [Quantpedia]Ray Dalio, the founder of Bridgewater Associates L.P. and the creator of the All-Weather investment strategy, recommends having some gold in a contemporary environment. He states, “In a world of ongoing pressure for policymakers across the globe to print and spend, zero interest rates, tectonic(...)