Quant Mashup Linking Attribution Factors [Quant Dare]In the business of performance measurement, a recurrent task is the breakdown of a stream of returns into meaningful contributions from different factors, in order to identify the driving financial forces or sources of risk. Eventually, these daily contributions have to be aggregated to explain the(...) The Case against EM Equities [Factor Research]EM equities are highly correlated to US stocks & high yield bonds, limiting diversification benefits They outperform primarily when the USD is depreciating, making it a currency play The largest MSCI EM index members will experience 50% population declines INTRODUCTION Seeing latex slowly(...) Get Green or Die Trying? [Alpha Architect]In 2015, 197 nations signed onto the Paris Agreement and committed to limiting global warming to less than 2 degrees C above preindustrial levels. Although the arguments are compelling, the drive to manage carbon risk presents quite a challenge for individual investors and portfolio managers.(...) The Explanatory Power of Factor Momentum [Alpha Architect]Momentum is the tendency for assets that have performed well (poorly) in the recent past to continue to perform well (poorly) in the future, at least for a short period of time. 1 In 1997, Mark Carhart, in his study “On Persistence in Mutual Fund Performance,” was the first to use a momentum(...) Factor momentum: a brief introduction [SR SV]Standard equity factors are autocorrelated. Hence, it is not surprising that factor strategies have also displayed momentum: past returns have historically predicted future returns. Indeed, factor momentum seems to explain all return momentum in individual stocks and across industries. Momentum has(...) Fit forecast weights by instrument, by group or fit across all markets? Or all three? [Investment Idiocy]I've long been a critic of the sort of people who think that one should run a different trading system for each instrument that you trade. It is the sort of thing that makes intuitive sense; surely the S&P 500 is a completely different animal to the Corn future? And that's probably(...) Different methods for mitigating overfitting on Neural Networks [Quant Dare]Using Machine Learning and Deep Learning models to solve scientific problems of greater or lesser complexity is a challenge. Referring to neural networks, on the one hand, simple networks with too little capacity will not learn the problem well producing a model that underfits the data. On the other(...) Update on Recent Matrix Profile Work [Dekalog Blog]Since my previous post, on Matrix Profile (MP), I have been doing a lot of online reading about MP and going back to various source papers and code that are available at the UCR Matrix Profile page. I have been doing this because, despite my initial enthusiasm, the R tsmp package didn't turn(...) Value and Momentum Investing: Combine or Separate? [Alpha Architect]When it comes to Value and Momentum investing we often get asked the following set of questions: Should I use value and momentum, in one screen, to form a single portfolio of stocks? ("Blended", "combined", or "integrated") Or should I focus on the value and momentum(...) Estimating Fair Value For The 10-Year Treasury Yield, Part II [Capital Spectator]Earlier this month, I reviewed a model that estimates a theoretical level for the world’s most-important interest rate: the 10-year Treasury yield. In today’s follow-up, let’s consider a second model for additional context. The goal in this series is to select several models with an eye on(...) Portfolio Construction in Venture Capital [Factor Research]A few winners generate most of the venture capital returns Given this asymmetrical return distribution, portfolios should be constructed equally Missing the winners is simply too risky INTRODUCTION 2020 turned out to be a record year for the venture capital industry, despite the global pandemic.(...) Machine Learning Based Statistical Arbitrage [Jonathan Kinlay]Applying Machine Learning in Statistical Arbitrage In this series of posts I want to focus on applications of machine learning in stat arb and pairs trading, including genetic algorithms, deep neural networks and reinforcement learning. Pair Selection Let’s begin with the subject of pairs(...) Free ticket to Algo Trading Summit Online Conference July 15th - Includes many Quantocracy contributors!The online conference for quants and algo-traders. Hear from the best and brightest minds in algo-trading. Join like-minded pros and gain hands-on, actionable information from the best and brightest minds in algo-trading Trees and networks [OSM]It’s been over a month since our last post and for that we must apologize. We endeavor to be more prolific, but sometimes work and life get in the way. On the work front, let’s just say we won’t have to spend as much time selling encyclopedias door-to-door, which should free up more time to(...) Pairs Trading - A Real-World Profitable Strategy [Milton FMR]Pairs trading is popular due to its simple approach and effectiveness. At the heart of the strategy is how the prices of two assets diverge and converge over time. Pairs trading algorithms profit from betting on the fact that spread deviations return to their mean. One of the more notable hedge(...) Bitcoin Elasticity and Volatility [Mark Best]So the crypto markets on May 19th were fun!? If you have been a part of these markets for any time, this volatility is not that surprising. That said it is still pretty amazing that the price can drop 30% in a single day. This is maybe more surprising since it is to the backdrop of an increase in(...) Predictability of the Value Premium Across Asset Classes [Alpha Architect]The value spread is the difference between the value signal in the long versus the short portfolio. This isn’t the first time we have hit on this topic. Wes and I have done several posts on the subject: Timing Value and Momentum with Valuation-Spreads The Returns to Value Strategies When Valuation(...) Are Ben Graham’s Disciples Value and Quality Factor Investors? [Alpha Architect]I examine the performance records of performance of Ben Graham's well-known disciples: Walter Schloss, Tom Knapp, Warren Buffett, Bill Ruane, Charlie Munger, Rick Guerin, and Stan Perlmeter. The research question I seek to address is the following: Do the academic "value" and(...) More Robust Strategies [Financial Hacker]The previous article dealt with John Ehlers’ AM and FM demodulating technology for separating signal and noise in price curves. In the S&C June issue he described a practical example. Applying his FM demodulator makes a strategy noticeably more robust – at least with parameter optimization.(...) ESG Performance Breakdown by E, S, and G [Alpha Architect]The relationship among ESG ratings from third-party providers has historically produced conflicting results. Differences in sourced information and weighting schemes have produced low correlations between ratings and as a result, have handicapped the efforts to understand the relationship between(...) Idea Streams #3 – Seeking Diversification Amidst Global Market Correlations [Quant Connect]The CSI 300 is a capitalization-weighted stock market index that tracks the top 300 stocks listed on the two main stock exchanges in mainland China. In April 2020, South China Morning Post reported that “the 120-day correlation between the CSI 300 Index and the S&P 500 index recently rose to(...) Max Sortino Added to the Portfolio Optimizer (And Whether That Matters) [Allocate Smartly]We track more than 60 Tactical Asset Allocation strategies, which members can combine together into custom portfolios. To make creating those portfolios easier, we provide an optimizer showing the best performing combinations of strategies based on the member’s investment objective, such as(...) $SPX Loves Tax Day [Quantifiable Edges]In the 4/12/19 blog I showed a study about US tax day (normally April 15th). The reason tax day may be important is that it is the last day that people can make IRA contributions to count for the previous tax year. This can create a last-minute rush and you will often have an inflow of funds heading(...) Managed Futures: Fast & Furious vs Slow & Steady [Factor Research]Managed futures strategies aim to exploit short- or long-term trends Short-term trend followers are often seen as offering better stock market crash protection characteristics Our analysis highlights that the differences are marginal INTRODUCTION Aesop’s famous story of the race between the(...) Research Review | 14 May 2021 | Stock Returns [Capital Spectator]Long-Horizon Stock Returns Are Positively Skewed Adam Farago and Erik Hjalmarsson (University of Gothenburg) April 28, 2021 At long horizons, multiplicative compounding induces strong-to-extreme positive skewness into stock returns; the magnitude of the effect is primarily determined by(...) The macro forces behind equity-bond price correlation [SR SV]Since the late 1990s, the negative price correlation of equity and high-grade bonds has reduced the volatility of balanced portfolios and boosted Sharpe ratios of leveraged “long-long” equity-bond strategies. However, this correlation is not structurally stable. Over the past 150 years,(...) Learning Candlestick Patterns [Tr8dr]In the previous posts I described an Reinforcement Learning approach to “Learning the Exit” part 1, part 2. My initial conclusions there have been: reward smoothing (with the labeler) leads to more robust results than a reward on position exit without smoothing the learning process struggled and(...) The Rust Programming Language [Mark Best]I love programming! There is something really satisfying about solving a complicated problem concisely. That said I see programming languages as a tool to solve a problem rather than purely coding for coding sake. I have used a lot of programming languages over the last 20 years namely Java, R,(...) Fixed income when you’re between a rock and a hard place - Part 2 [Alpha Architect]In Part 1, we defined fixed income factors. But factors alone will not solve each investor’s problem. Below, we extend the discussion by walking through a case study that shows how an asset allocator might use factors to solve a common problem: how to invest in a low yield environment given the(...) Getting historical data from MetaTrader [Thiago Marzagao]Getting historical intraday financial data can be a pain, especially for non-US markets. If you have deep pockets you can simply buy the data you need, but for retail investors the cost is prohibitive. If you want historical transaction-level data for the Brazilian stock market, for instance,(...) Strategy Backtesting in Mathematica [Jonathan Kinlay]This is a snippet from a strategy backtesting system that I am currently building in Mathematica. One of the challenges when building systems in WL is to avoid looping wherever possible. This can usually be accomplished with some thought, and the efficiency gains can be significant. But it can be(...) Different ranking methods for a monthly S&P500 Stock Rotation Strategy [Alvarez Quant Trading]Recently for my own trading, I have been researching rotational strategies on both the weekly and monthly timeframes. The most common indicator that I use for ranking stocks is Rate of Change (ROC) of the closing price. I read about using Rate of Change on the EMA to rank stocks. I liked a small(...) A Decade of Cryptocurrencies [Grzegorz Link]It has been almost 11 years since the first official Bitcoin trades in July of 2010. It's price has experienced quite a run. Although controversial, cryptocurrencies have firmly taken hold of the current investing landscape, won hearts and minds of groups of investors, suggesting they are here(...) Value Investing Still Beats Growth Investing, Historically [Alpha Architect]A few weeks ago I saw comments on Twitter regarding the Russell 3,000 Value and Growth indices having approximately the same returns since inception. For example, here is Ben Johnson from Morningstar 1 As viewed from this tweet, and is born out in the data for the Russell indices, it appears that(...) Estimating Fair Value For The 10-Year Treasury Yield [Capital Spectator]The world is awash in efforts to model a theoretical value for the stock market – the CAPE ratio, for example. But while the equities hog much of the attention on this front, similar analytics for the world’s most important interest rate are no less valuable. How to begin? Not surprisingly,(...) Copula for Statistical Arbitrage: C-Vine Copula Trading [Hudson and Thames]This is the sixth article of the copula-based statistical arbitrage series. You can read all the articles in chronological order below. In this series, we dedicate articles 1-3 to pairs-trading using bivariate copulas and 4-6 to multi-assets statistical arbitrage using vine copulas. Copula for Pairs(...) Kalman Filter Techniques And Statistical Arbitrage In China's Futures Market In Python [Quant Insti]Contrary to a more developed market, arbitrage opportunities are not readily realised which suggests there might be opportunities for those looking and able to take advantage of them. This project focuses on China's futures market using Statistical Arbitrage and Pair trading techniques. This(...) Improving the Odds of Value Investing [Factor Research]The stock market volatility, skewness, and yield curve influence the performance of the value factor Investors require a certain market environment to buy troubled companies The key performance driver of the value factor is risk sentiment INTRODUCTION Ted Theodore first wrote about value versus(...) How I learned to stopped worrying and love the Bitcoin (future) [Investment Idiocy]For the last seven years since I started trading my own account I've pretty much kept the same set of futures markets: around 40 or so, with very occasional changes. The number is limited, as to trade more markets I'd need more capital. The set of markets I have is a compromise between(...) “Accelerating Dual Momentum” Redux: Longer History, Tempered Expectations [Allocate Smartly]This is a follow up to a strategy we’ve covered previously: Accelerating Dual Momentum (ADM) from EngineeredPortfolio.com. See our first test of ADM, which includes a description of the strategy rules and our own analysis of the strategy. Here we’ve extended our test by 20 years to include a(...) Risk Parity Asset Allocation [Quantpedia]This article is a primer into the methodology we use for the Portfolio Risk Parity report, which is a part of our Quantpedia Pro offering. We explain three risk parity methodologies – Naive Risk Parity (inverse volatility weighted), Equal Risk Contribution and Maximum Diversification. Quantpedia(...) U.K. Value Factor - The 200+ Year View [Two Centuries Investments]One year ago, I wrote about the U.S. Value factor and what I found by extending its history back in time before 1926. In summary, I wrote that Value’s drawdown in March 2020 was normal and likely close to its bottom. Without the insights from the extended history, Value had appeared ‘dead’(...) Text-Based Factor Investing [Alpha Architect]This is the first part of a series of guest posts by Kai Wu, the CIO & Founder of Sparkline Capital. The Factor Zoo As readers of Alpha Architect’s blog, you’re certainly familiar with factor investing. Factors are quantifiable firm characteristics that explain cross-sectional stock returns.(...) Resurrecting the Value Premium [Alpha Architect]The dramatic underperformance of value stocks as defined by the HmL (the return on high book-to-market stocks minus the return on low book-to-market stocks) since 2017 has led many to question the existence of the value premium. The recent drawdown has been by far the largest ever experienced. From(...) Quant Minds Online Virtual Conference, May 24-28. Save 10% with this link. [Quant Minds]Mid-year learning and knowledge sharing for the quant finance community A week of 5 precision-engineered digital summits, laser-focused on the most innovative research. Choose the days that matter to you. Meet the quants finding solutions to the same problems you face. 60/40 Portfolios Without Bonds [Factor Research]Bonds have become less useful in asset allocation given low to negative expected returns Liquid alternative strategies can be used to replace bonds From a historic perspective, long volatility strategies would have been especially attractive INTRODUCTION John Maynard Keynes famously asked, “when(...) Macro information waste and the quantamental solution [SR SV]Financial markets are not macro information efficient. This means that investment decisions miss out on ample relevant macroeconomic data and facts. Information goes to waste due to research costs, trading restrictions, and external effects. Evidence of macro information inefficiency includes(...) Market Timing Using Aggregate Equity Allocation Signals [Alpha Architect]When it comes to predicting long-term equity returns, several well-known indicators come to mind—for example, the CAPE ratio, Tobin’s Q, and Market Cap to GDP, to name a few. Yet there is another indicator without nearly as high of a profile that has outperformed the aforementioned indicators(...) Research Review | 30 April 2021 | Interest Rates & Yield Curves [Capital Spectator]Forecasting Bond Risk Premia using Stationary Yield Factors Tobias Hoogteijling (Robeco Asset Management), et al. April 12, 2021 The standard way to summarize the yield curve is to use the first three principal components of the yield curve, resulting in level, slope and curvature factors. Yields,(...) Copula for Statistical Arbitrage: Stocks Selection [Hudson and Thames]This is the fifth article of the copula-based statistical arbitrage series. You can read the previous four articles with the first three focusing on pairs-trading: Copula for Pairs Trading: A Detailed, But Practical Introduction. Copula for Pairs Trading: Sampling and Fitting to Data. Copula for(...)