Quant Mashup Strategies That Play Well With Others [Allocate Smartly]We track more than 60 tactical asset allocation strategies. In this post we look at which of those strategies are most often recommended by common portfolio optimization techniques, and why strategies that “play well with others” are not always the best strategies. First, a little background for(...) Factor Olympics Q2 2021 [Factor Research]The Q1 2021 factor rotation into Value and Size has reversed Value is the only factor with positive performance in 1H 2021 Momentum has generated the most negative returns INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years. Specifically, we(...) When DJI Rallies From 50-day Low to 50-day High Very Quickly [Quantifiable Edges]The SPX, Dow, and NASDQ all closed at all-time highs on Friday. Just 10 days ago the Dow closed at a 50-day low. That quick of a move from low to high is quite an accomplishment. Over the last 101 years this just the 21st time the Dow has managed to move from a 50-day closing low to a 50-day closing(...) Talking to the dead / simple heuristic position selection / small account problems - part four / EPIC FAIL #2 [Investment Idiocy]Over the last few posts I've been grappling with the difficulties of trading futures with a retail sized account. I've tried a couple of things so far - a complex dynamic optimisation (here and here) where I try and optimise the portfolio every day in the knowledge that I can only take(...) Low Volatility Factor Investing: How Investment Horizon Affects Results [Alpha Architect]Two of the more interesting puzzles in finance are the high beta anomaly (high beta stocks have lower returns) and the IVOL anomaly (stocks with greater idiosyncratic volatility have produced lower returns). These are anomalies because both beta and IVOL are viewed as risk factors and should be(...) Community Alpha of @QuantConnect - Part 1: Following numerous quantitative strategies [Quantpedia]Nowadays, social media are involved in fields that were unimaginable in the past. Among others, the world of finance, trading and investing is no exception. For example, Stocktwits is a strong community in this area, Seeking Alpha connects (non)professional analysts, and Twitter connects(...) Distance Approach in Pairs Trading: Part I [Hudson and Thames]There are many types of approaches you can use in pairs trading, but the Distance Approach is one of the most widely used because of its simplicity. The basic concept is as follows: Using Euclidean squared distance on the normalized price time series, n closest pairs of assets are chosen as pairs. S(...) Static optimisation of the best set of instruments to hold in a futures trading system [Investment Idiocy]In a couple of recent posts (here and here) I explored the idea of using dynamic optimisation to deal with the following problem: diversification across markets is good, but requires more capital. That didn't work out so well! I can also appreciate that this is *way* beyond most peoples idea of(...) Is Zorro project worth trying for algorithmic trading? [Trading Enigma]The online trading platform is growing bigger day by day. More people are entering this industry, and they are trying to come up with unique trading strategies. But automated trading has taken the industry by storm. Automated trading is the best thing an independent trader can ask for. But(...) Can Investors Beat Active Mutual Funds with Cheap ETFs, YUP! [Alpha Architect]The research (and the theory) has convincingly shown that mutual funds should and do underperform a passive index by an amount approximately equal to fees. However, no one has actually tried to construct the active mutual fund dominating passive strategy using commercially available products. It(...) Paul Novell's Bond-COMP Tactical Bond Strategy [Allocate Smartly]This is a test of a tactical bond strategy from Paul Novell of Investing for a Living. It rotates between credit bond ETFs and defensive assets based on the same rules as his popular SPY-COMP strategy. Backtested results from 1970 follow. Results are net of transaction costs – see backtest(...) Factor Exposure Analysis: Exploring Residualization [Factor Research]Regression analysis is frequently subject to multicollinearity Independent variables can be residualized Using residualized variables in a factor exposure analysis identifies different drivers DISCLAIMER “The worth of an econometrics textbook tends to be inversely related to the technical material(...) Bayesian vs. Frequentist in Practice, part 3 [Eran Raviv]This post is inspired by Leo Breiman’s opinion piece “No Bayesians in foxholes”. The saying “there are no atheists in foxholes” refers to the fact that if you are in the foxhole (being bombarded..), you pray! Leo’s paraphrase indicates that when complex, real problems are present, there(...) When Persistent Higher Highs Don’t Suggest a Pullback [Quantifiable Edges]SPX managed to make an intraday high for the 5th day in a row on Friday. An interesting study from the Quantifinder looked at the possible impact of 5 higher highs occurring. The studies examined the impact of the position of the market when the 5 higher highs occurred. I broke it down again over(...) A market-to-book formula for equity strategies [SR SV]A new proxy formula for equity market-to-book ratios suggests that (the logarithm of) such a ratio is equal to the discounted expected value of (i) differences between return on equity and market returns and (ii) the net value added from share issuance or repurchases. A firm with a higher(...) Optimising portfolios for small accounts: Dynamic optimisation testing -> EPIC FAIL [Investment Idiocy]This is part two in a series of posts about using optimisation to get the best possible portfolio given a relatively small amount of capital. Part one is here (where I discussed the idea). You should read that now, if you haven't already done so. In this post I show you and explain the code and(...) Research Review | 25 June 2021 | Tail Risk [Capital Spectator]Equity Tail Risk in the Treasury Bond Market Mirco Rubin (EDHEC) and Dario Ruzzi (Bank of Italy) December 23, 2020 This paper quantifies the effects of equity tail risk on the US government bond market. We estimate equity tail risk as the option-implied stock market volatility that stems from large(...) Introducing: Arbitragelab Tear Sheets [Hudson and Thames]Pairs selection is the first crucial step to building a pairs trading strategy. And it is no surprise, to perform it correctly, one must diligently examine, compare and contrast numerous test results, graphs and characteristics. For example, cointegration analysis alone can be performed in one of(...) Return based quality factor on Warsaw Stock Exchange [Mateusz Dadej]Recently I ran across an interesting paper published by National Bureau of Economic Research entitled “Return Based Measue of Firm Quality”. I happen to have a suitable data and thought why not reproduce it on data from polish stock exchange in the free time. It turned out not so bad and thanks(...) An Introduction to Unsupervised Learning for Trading [Quant Insti]In the previous blogs, we examined supervised learning algorithms like linear regression in detail. In this blog, we look at what unsupervised learning is and how it differs from supervised learning. Then, we move on to discuss some use cases of unsupervised learning in investment and trading. We(...) A Sensible Approach to Bitcoin [Dual Momentum]Last year when bitcoin had its fourth drawdown of 80% in the past ten years, I thought It might be a good time to reenter that market. Having traded digital assets in 2017, I was familiar with the reasons for owning bitcoin. I won’t reiterate them here. You can find information on bitcoin,(...) Replicating the J.P. Morgan Efficiente Index [Portfolio Optimizer]The J.P. Morgan Efficiente 5 Index is a tactical asset allocation strategy designed by J.P. Morgan based on a broad universe of 13 ETFs. This post will illustrate how to replicate this strategy with Google Sheets. Notes: A fully functional spreadsheet corresponding to this post is available here.(...) Improving crypto investing with Reinforcement Learning [Quant Dare]Cryptocurrencies are a hot topic in the investing world, but is it possible to create an investment methodology combining modern Reinforcement Learning with classical indicators? Along this blog we have covered topics such as how to automate cryptocurrencies investment or whether reinforcement(...) Pairs Trading with Stochastic Control and OU process [Hudson and Thames]The concept of pairs trading is pretty straightforward. As described in [Gatev et al. (2006)], we first find two stocks that have moved together historically and then monitor the spread between these stocks. If the prices of the two stocks diverge, we short the winner and go long on the loser,(...) Private Equity: Is There Anything Special There? [Alpha Architect]As the following table demonstrates, since its inception in the 1970s, the private equity industry has grown significantly. According to Preqin data, there are now more than 18,000 private equity funds, with assets under management exceeding $4 trillion. Source: NACUBO endowment studies, FY(...) Portfolio Optimization: Replicate a corporate bond index via Mixed-Integer Programming [DileQuante]While portfolio optimization is well known in the Equity space, in the Fixed Income industry, the subject is less discussed although it has very specific needs and it can be more complex compared to its Equity counterparts. One key difference between the two of them is the trading lot size. In(...) Avoiding Disasters with Catastrophe Bonds? [Factor Research]Catastrophe bonds offered exceptionally high risk-adjusted returns since 2005 These were uncorrelated to equities, making cat bonds attractive for diversification However, cat bonds might have underpriced risk historically, raising concerns going forward INTRODUCTION The global pandemic continues to(...) Factors Timing is a Difficult Practice [Alpha Architect]Last week Tommi looked into whether hedge funds could time factors. The conclusion? Probably. This week we're going to see if Mutual Fund managers have any skill at cracking the factor timing code. The conclusion? They aren't great factor timers! The authors of the paper study a large(...) Buy&Hold? No, Buy&Sell! [Financial Hacker]There’s no doubt that buying and holding index ETFs is a long-term profitable strategy. But it has two problems. It does not reinvest profits, so the capital grows only linearly, not exponentially. And it exposes the capital to the full rollercoaster market risk. A sure way to go out of the market(...) Many explanations for the same fact [Alex Chinco]Asset-pricing research consistently produces many different explanations for the same empirical facts. As a rule of thumb, you should expect asset-pricing researchers to wildly overachieve. Behavioral researchers can typically point to several psychological biases which might explain the same(...) Can astrology predict financial markets? (Of course not) [Mathematical Investor]In a previous MathInvestor article, we mentioned how absurd it would be if someone offered predictions of stock or bond prices or cryptocurrency rates based on astrological signs. Consider for a moment that financial market prices are based on a confluence of many thousands of factors worldwide,(...) The Performance of Volatility-Managed Portfolios [Alpha Architect]As far back as 1976, with the publication of Fischer Black’s “Studies of Stock Price Volatility Changes” financial economists have known that volatility and returns are negatively correlated. This relationship results in the tendency to produce negative equity returns in times of high(...) Serenity DevOps #1 - Motivation [Kyle Downey]Serenity's production server is a Linux box sitting next to my desk which runs Ubuntu's microk8s Kubernetes distribution. It runs 24x7 collecting tick data from several cryptocurrency exchanges and once a day uploads the tick data to Azure Blob Storage. This presents a problem: this highly(...) More ideas for ranking methods on a monthly S&P500 Stock Rotation Strategy [Alvarez Quant Trading]My last post on Different ranking methods for a monthly S&P500 Stock Rotation Strategy generated lots of emails on other ideas to try. Below are the results of these ideas Base Rules Backtest from 1/1/2007-12/31/2020. Buy It is the last trading day of the month Stock is a member of the(...) Automating cryptocurrencies investment [Quant Dare]Who has never heard about cryptocurrencies: Bitcoin, Ethereum, Cardano, or even the latest ones, such as Shiba or Safemoon? The investors are rapidly increasing their positions in those assets, although investing in them is usually a pain in the neck. These assets have a high volatility and their(...) Podcast with Ernie Chan (@ChanEP): Predicting profitability using machine learning [Better System Trader]Quant trader Ernie Chan from PredictNow.ai joins us to discuss how to predict the profitability of trades using machine learning, including: Unconditional probability and the problem with win% in backtest reports, Why “conditional probability” is much more useful for a trader and how to apply(...) Financial Mentor's All-Weather Quad Momentum [Allocate Smartly]This is an independent test of the tactical strategy “All-Weather Quad Momentum” (AWQM) from Todd Tresidder of FinancialMentor.com. Many of our members came to us from Financial Mentor, so it’s fitting that we add a strategy to our platform that demonstrates his approach to asset allocation.(...) Markowitz Model [Quantpedia]We again present a short article as an insight into the methodology of the Quantpedia Pro report – this time for the Markowitz Portfolio Optimization. As usually, Quantpedia Pro allows the optimization of model portfolios built from the passive market factors (commodities, equities, fixed income,(...) Can Hedge Funds Successfully Time Factors? [Alpha Architect]This study pulls together several threads in the academic literature: (1) the persistence of hedge fund outperformance; (2) the apparent use of time-varying beta exposures by hedge funds, where betas are predicated on conditions such as leverage, carry trade, major events and conditions in the(...) Create a Personal Portfolio/Wealth Simulation in Python [Python For Finance]This post will introduce the first part (of multiple) where we build up a personal finance model to help simulate future time periods based on certain chosen input variables. We will input variables such as our current investable asset base, our annual salary, expected monthly inflows and outflows(...) Mid-Caps – The Hidden Champions? [Factor Research]Mid-cap stocks are less popular than small or large caps In the US, they only outperformed in one out of 10 decades Globally, they have done better, creating a conundrum for investors INTRODUCTION A few weeks ago, David Stevenson, a well-known journalist and entrepreneur, asked me about my view on(...) Markets’ neglect of macro news [SR SV]Empirical evidence suggests that investors pay less attention to macroeconomic news when market sentiment is positive. Market responses to economic data surprises have historically been muted in high sentiment periods. Behavioral research supports the idea that investors prefer heuristic(...) Honest Guide to Getting a Quant Job in Finance: (1) So, you want to be a Quant?! [Quant at Risk]They say that a journey of thousand miles commences with a single step. So, here you are, firm in your own resolutions or hesitating where to go. Graduated from a university or standing and trembling about next move in your life. Fired from one job or looking for another opportunity to seize.(...) Combining Value and Profitability Factors: the International Evidence [Alpha Architect]My October 29, 2020, article for Alpha Architect examined the research on the profitability factor. I then reviewed the findings of the June 2020 study “On the Conjoint Nature of Value and Profitability,” which analyzed how combining the profitability factor with the value factor— tilting the(...) Virtual Conference: Machine Learning for Quantitative Analytics, Save 200 GBP with code CM485_QC200 [Marcus Evans]SAVE 200 GBP WITH CODE CM485_QC200. Financial firms must strike the right balance when developing machine learning so that their models are intelligent enough to provide useful information whilst also being simple enough to produce signals that are understood and explainable. Attending this premier(...) Concepts of Entropy in Finance: Transfer entropy [Quant Dare]The concept of entropy has many useful applications in finance such as measuring risk, uncertainty, or noise in a signal. In this post we will focus on transfer entropy, a useful tool for causal inference between financial time series. What is entropy? Entropy in general represents the uncertainty,(...) Optimising my way out of a small fund problem - part one [Investment Idiocy]This is part one of a series of posts about using optimisation to get the best possible portfolio given a relatively small amount of capital. In this short post I present the idea, and discuss some issues that I need to resolve. It's a bit of a stream of conciousness! It's less of a blog(...) Still Using Book to Market for a Value Metric? Read This. [Alpha Architect]Book to Market (B/M) has been a prominent indicator used to construct "value" tilted portfolios. The love affair with B/M started with Graham and Dodd (1934), but became the gold standard after Fama and French (1992). Historically, B/M was a reasonable ratio to express the value factor and(...) Liquid Alt Juggernauts: Worth their Salt? [Factor Research]Liquid alternative mutual funds only captured 10% of the market share from hedge funds The alpha generated since 2013 was essentially zero Long-short equity funds can be replicated simply via market beta + cash INTRODUCTION One of the most perplexing questions in the investment industry is why(...) This Time is Different? Consider Quantifying Subjective Priors [Alpha Architect]This time is different. --John Templeton "This time is different," is a sentiment that leads many investors to stray from using data analysis in their investment decision process and more towards discretionary judgment. The logic as to why data analysis techniques may not apply to(...)