Quant Mashup The Impact of ESG Scores on Asset Prices [Alpha Architect]Sustainable investing has grown substantially in recent years, demonstrating that investor demand can be driven by nonfinancial issues such as environmental (E), social (S), and governance (G) characteristics. A full list of our posts on ESG can be found here. The demand from investors who have a(...) The MAD indicator [Financial Hacker]As an application to the windowing technique described the the previous article, John Ehlers proposed a new trend indicator that he claimed is robust and yet simple. The latter is certainly true, as the MAD (Moving Average Difference) oscillator is, as the name says, just the difference of two(...) Optimal Trading Thresholds for the O-U Process [Hudson and Thames]Pairs trading or statistical arbitrage is a famous strategy among institutional and individual investors since the 1990s. The concept behind this kind of strategy is straightforward. If the prices of assets move together historically, this tendency is likely to continue in the future. When the(...) Do Big Value Spreads Mean Big Returns to Value Strategies? [Alpha Architect]Okay, we can’t keep it a secret, we are fans of value investing 1 So when Cliff Asness and his team at AQR write about value, we get excited. The analysis reported in this research confirms the relationship between static value strategies and future returns while incorporating the notion that the(...) Insider Trading: What Happens Behind Closed Doors [Quantpedia]Corporate insiders often have insight into a company’s private information, which might help them predict how the shares’ price will move in the coming days. However, laws and regulations are designed to keep them from trading based on this knowledge, as it would be unfair and hurt the(...) Less Efficient Markets = Higher Alpha? [Factor Research]Emerging market mutual fund managers struggle to outperform EM hedge fund managers failed to generate meaningful alpha EM opportunities seem to come with proportional risks INTRODUCTION Students often ask me for career advice. It is not a particularly satisfying experience. On the one hand, these(...) Three Simple Tactical FX Hedging Strategies [Quantpedia]There are many ways one can lose money when investing, and exchange rates are one of the potential risk factors. Luckily, there are several ways to minimize this type of loss in your portfolio. Systematic tactical FX hedging that uses currency factor strategies (for example currency carry, currency(...) Research Review | 8 October 2021 | Dynamic Portfolio Strategies [Capital Spectator]Time-Varying Factor Allocation Stefan Vincenz and Tom Oskar Karl Zeissler (Vienna U. of Economics and Business) September 15, 2021 In this empirical study, we provide evidence on how predictive information can be utilized to profitably allocate a cross-asset factor portfolio, covering various(...) ETF Liquidity Risks? A Discussion [Alpha Architect]Because of the complexity inherent to ETF trading in the secondary market, there are frequent misunderstandings about the relationship between the liquidity of the underlying securities and the liquidity of ETFs. Sometimes we hear that ETFs have excess liquidity to the underlying and at others, ETFs(...) How to Use Deep Order Flow Imbalance [Quantpedia]Order book information is crucial for traders, but it can be complex. With the numbers of stocks listed in stock exchanges, it is impossible to track all the available information for the human mind. Therefore, the order flows could be an interesting dataset for machine learning models. The novel(...) Studying Financial Idea "Infection Rates" [Alpha Architect]Previously, we have written about the Momentum of News, which highlights that lots of positive news can lead to future positive returns (without a look-ahead bias!). Today’s post builds on the concept that news (and sentiment?) are predictive for returns — which sounds intuitive. The writers of(...) How to Trade like a Turtle without $1,000,000 [Raposa Trade]A simple job ad was placed in a handful of major newspapers calling for participants to be trained as traders. Of the applicants, a total of 23 individuals were chosen to become Turtle Traders: systematic trend followers who simply followed rules and made millions in the process. These were average,(...) Factor Olympics Q3 2021 [Factor Research]2021 is shaping up as a year of undifferentiated factor performance Value is the only factor with positive performance in year-to-date 2021 The Size factor has generated the most negative returns INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10(...) Why a Bounce on a Friday is Encouraging [Quantifiable Edges]Friday saw the market bounce after several indices closing at multi-month lows on Thursday. Fridays are interesting in that they are the least likely day of the week for a selloff to end or a rally to begin. But when rallies do start on a Friday, they have shown the best odds of success of any day(...) Mr Greedy and the Tale of the Minimum Tracking Error Variance [Investment Idiocy]This is the sixth (!) post in a (loosely defined) series about finding the best way to trade futures with a relatively small account size. This first (old) post, which wasn't conciously part of a series, uses an 'ugly hack': a non linear rescaling of forecasts such that we only take(...) Value Investing and Intangibles [Alpha Architect]Recent research, including the 2020 studies “Explaining the Recent Failure of Value Investing” and “Intangible Capital and the Value Factor: Has Your Value Definition Just Expired?,” have investigated the impact on U.S. value strategies of the increase in the relative importance of(...) Multi-day Limits for Mean Reversion [Alvarez Quant Trading]A reader recently suggested leaving the limit orders for a mean reversion trade on for a couple of days. Typically, these orders are good only for one day unless the stock sets up again. I did not think that this would help but as I always tell my consulting clients when they ask me if an idea will(...) Introduction to Clustering Methods In Portfolio Management – Part 3 [Quantpedia]This is the third and final article from the clustering series. If you’ve missed the previous parts, here you can find the first and second parts of the series. This section examines trading strategies based on previously introduced clustering methods. The complete Portfolio Clustering report will(...) Efficient Long Duration Treasury Investing [Simplify]The shape of the US Treasury curve over the past five decades has provided investors with the opportunity to create more efficient long duration exposure than simply buying long-dated Treasuries. In this article we will show how the most efficient long duration exposure is often generated by(...) Asset Pricing Models in China [Quantpedia]The CAPM model was a breakthrough for asset pricing, but the times where the market factor was most widely used are long gone. Nowadays, if we exaggerate a bit, we have as many factors as we want. Therefore, it might not be straightforward which factor model should be used. Hanauer et al. (2021)(...) Macro risks and the term structure of interest rates [Alpha Architect]The authors of this paper identify aggregate supply and aggregate demand shocks for the US economy utilizing macroeconomic data on inflation, real GDP growth, core inflation, and the unemployment gap. They then go on to extract how these shocks to supply and demand impact the term structure of(...) This Time It’s Different!? [Factor Research]Options trading has increased to record highs Some data points indicate changes in the market structure However, these changes are likely temporary rather than structural INTRODUCTION During the 1954 recession in the U.S., Sir John Templeton wrote to his clients that “this time it’s different”(...) How Random is the Market? Testing the Random Walk Hypothesis [Raposa Trade]A mainstay of academic research into the market is the Random Walk Hypothesis (RWH). This is the idea that market moves are random and follow a normal distribution that can be easily described using a concept borrowed from physics called Brownian Motion. This makes the market mathematics manageable,(...) Podcast Interview with Grzegorz Link [System Trader Show]Today’s guest is Grzegorz Link, who professionally works as a quant for an investment fund. Grzegorz is a physicist by education, which may surprise some. However, the thing is that in building market models, skills such as programming and mathematics are the primary tools, which is the same for(...) Crowding and Factor Premiums [Alpha Architect]My March 23, 2021, article for Alpha Architect addressed the issue that in recent years the field of empirical finance has faced challenges from papers arguing that there is a replication crisis because the majority of studies cannot be replicated and/or their findings are the result of multiple(...) New Site! Trailing Stops in Various AutoCorrelation and Volatility Regimes [Derek Wong]Abstract: I examine trailing stops in real markets and various autocorrelation and volatility regimes using synthetic data. Exits are notoriously under-studied and may be a source of edge. I examine three key hypotheses using my take on Tom Basso’s random entry method to remove entry from the(...) Steal ideas, not implementations [Robot Wealth]Imagine you’re a relatively small, independent trader trying to turn trading from a hobby into a serious business. If that’s you, then there are a few concepts that will help you pick the right trades to get after. This is important because picking the right trades is most of the game. First,(...) Getting serious about part-time trading w/ @Robot_Wealth [Better System Trader]Kris Longmore from RobotWealth joins us to discuss 4 key areas part-time traders need to take seriously to be successful, including: Why it’s important to understanding market participants and why they’re trading, 3 common things traders do that almost guarantee they will blow up, Setting(...) Factor contribution [Quant Dare]In this post we are going to examine two alternative methods of calculating the factor contribution to the performance of an equity portfolio. To evaluate the performance of an equity portfolio regarding the exposure to risk factors, it is common to calculate the contribution of each factor to the(...) Look-Ahead Bias, and Why Backtests Overpromise [Enjine]The Korean drama ‘Sisyphus’ is a story about a couple of heroes who struggle against a villain from the future. Villains need deep pockets to pull off large schemes, and in Sisyphus’ case, the villain amasses his wealth by using his knowledge of the future to make money on the stock market. In(...) Monday’s Strong Selling & New Lows Triggered This Historically Bullish Setup [Quantifiable Edges]Many studies identified by the Quantifnder Monday afternoon showed the strong selling and closing lows to be potentially bullish. And Turnaround Tuesday is typically the best day for a bounce to begin. The study below considered the long-term uptrend, intermediate-term low, and strong selling on(...) ESG Ratings are Noisy. Buyer Beware [Alpha Architect]ESG products have been flooding the market and it is difficult for investors to assess the ground truth. To make matters worse, with limited sample size periods and datasets, trying to determine “evidence-based” ESG insights, is challenging. Nonetheless, we’ve been covering the academic(...) Researcher Motives [CXO Advisory]Do motives of financial market researchers justify strong skepticism of their findings? In his brief August 2021 paper entitled “Be Skeptical of Asset Management Research”, Campbell Harvey argues that economic incentives undermine belief in findings of both academic and practitioner financial(...) Are Stock Markets Becoming More Correlated? [Factor Research]The correlation of stock markets has stopped increasing since the GFC The Value and Momentum factors are trading at peak correlations Correlations can change dramatically when using different data sources INTRODUCTION Globalization is less of a smooth ride on a river barge and more akin to river(...) Research Review | 17 Sep 2021 | Financial Shocks And Crises [Capital Spectator]We present a new database of banking-crisis interventions since the 13th century. The database includes 1886 interventions in 20 categories across 138 countries, covering interventions during all of the crises identified in the main banking-crisis chronologies, while also cataloguing a large number(...) Introduction to Clustering Methods In Portfolio Management - Part 1 [Quantpedia]At the beginning of October, we plan to introduce for our Quantpedia Pro clients a new Quantpedia Pro report dedicated to clustering methods in portfolio management. The theory behind this report is more extensive; therefore, we have decided to split the introduction into our methodology into three(...) Is Currency Momentum Factor Momentum? [Alpha Architect]A large body of evidence, including the studies “Is There Momentum in Factor Premia? Evidence from International Equity Markets,” Factor Momentum Everywhere (Summary)” and “Factor Momentum and the Momentum Factor,” has demonstrated that momentum exists across financial markets (stocks,(...) Netting income [OSM]For fundamental equity investors, the financial statement is the launchpad for the search for value. True, quants use financial statements too. But they spend less time on what the numbers mean, than on what they are. To produce a financial statement that adequately captures the economic (not GAAP(...) New Site! Designing a high-frequency-trading system/simulation lab [Caravaggio in Binary]This text is a primer on how to develop a high-frequency-trading system/simulation lab, with focus on the Nasdaq exchange and the ITCH protocol. The code is entirely written in C and follows the data-oriented-design methodology. The reason for picking C instead of C++, when the latter is the(...) Long Short Equity Strategy [Quant Insti]As the name suggests, long short equity strategy is one where we take both long and short positions in different equities. This strategy is normally used by hedge funds to generate greater risk adjusted returns due to its inherently low risk characteristics. In this article, you will learn about how(...) Equal vs Market Cap-Weighted Portfolios in Stock Market Crashes [Factor Research]There is no consensus whether an equal or market cap-weighted allocation model for stocks is superior Both generated similar drawdowns during stock market crashes on average Theoretically, equal-weight is superior, but practically cap-weighted INTRODUCTION “Diversify, reduce fees, avoid active(...) How To Reduce Lag In A Moving Average [Raposa Trade]Moving average indicators are commonly used to give traders a general idea about the direction of the trend by smoothing the price series. One of the big drawbacks to most common moving averages is the lag with which they operate. A strong trend up or down may take a long time to get confirmation(...) The Reciprocal Fibonacci Constant [Jonathan Kinlay] How to Use Lexical Density of Company Fillings [Quantpedia]The application of alternative data is currently a strong trend in the investment industry. We, too, analyzed few datasets in the past, be it ESG data, sentiment, or company fillings. This article continues the exploration of the alt-data space. This time, we use the research paper by Joenväärä(...) Optimizing implicitly using genetic algorithms [Quant Dare]Sometimes it is too costly, even impossible, to explicitly optimize an equation. Today we will see how to optimize implicitly using genetic algorithms. Sometimes, in finance as well as in other aspects of life, a problem presents itself in the most clear of terms: an explicit equation which we must(...) Is The Value Premium Smaller Than We Thought? [Alpha Architect]From 2017 through March 2020, the relative performance of value stocks in the U.S. was so poor, experiencing its largest drawdown in history, that many investors jumped to the conclusion that the value premium was dead. It is certainly possible that what economists call a “regime change” could(...) A New Return Asymmetry Investment Factor in Commodity Futures [Quantpedia]As mentioned several times, Quantpedia is a big fan of transferring ideas from one asset class to another. This article is another example; we use an idea originally tested on Chinese stocks and apply it to the commodity futures investment universe. The resultant return new asymmetry investment(...) Managing Data Outliers With Quantile Regression: Part I [Capital Spectator]One of the more difficult challenges for modeling is deciding how (or if) to deal with extreme data points. It’s a common problem in economic and financial numbers. Fat tailed distributions are standard fare in stock market returns, for example. Meanwhile, the dramatic collapse in the economy(...) Do Cryptocurrencies Improve Portfolio Diversification? [Alpha Architect]Portfolio diversification benefits are often driven by correlation coefficients, but this analysis can get complicated, fast. Over time academics and practitioners have realized that it is not enough to simply calculate a correlation using short return intervals (daily?, monthly?) over a sample(...) Introduction to Hedge Ratio Estimation Methods [Hudson and Thames]The hedge ratio estimation problem is one of the most important issues for portfolio managers. The key concept of the hedging problem can be posed as the following equation: S_{t}=P_{1, t}+\sum_{n=2}^{N} \omega_{n} P_{n, t} where P_1 represents the market value at observation t of a portfolio we(...)