Quant Mashup Reducing data dimensionality using PCA [Quant Dare]One common problem when looking at financial data is the enormous number of dimensions we have to deal with. For instance, if we are looking at data from the S&P 500® index, we will have around 500 dimensions to work with! If we have enough computing power, we will be able to process so much(...) New Site: GANs and Synthetic Market Data (h/t @thodoha) [Mark Best]I have been thinking a lot about risk lately. The liquidity injections from the FED are pushing risk assets higher and higher. There seem to be bubbles in nearly every speculative assets. The main concern long term would be rising rates at the same time as a falling dollar suggesting there is no(...) Learning the Exit (part 2) [Tr8dr]As described in my prior post Learning the Exit (part 1), I have a model that indicates mean reversion entries with ~81% accuracy, however I did not have a good approach in handling the exit. While 81% of MR signals had a minimum profit of 25% (of prior amplitude), the mean profit available was(...) Factor Investing: The Truth Has Many Shades [Factor Research]The data from Professor French has laid the foundation for factor investing However, over time factor portfolio construction grew complex and with many nuances Returns may look more or less attractive, which makes a weak foundation INTRODUCTION When I was growing up one of my favourite TV shows was(...) Building a Zipline bundle for Yahoo CSV files [Quant Insti]Zipline is a fantastic tool for backtesting and data is the main raw material for doing this kind of analysis. In this post, we are going to focus on how to load our own data files. Through an example, we will create a bundle to load data from csv files downloaded from Yahoo finance. Building a Better q-Factor Asset Pricing Model [Alpha Architect]Since the development of the first asset pricing model, the Capital Asset Pricing Model (CAPM), academic research has attempted to develop models that increase the explanatory power of the cross-section of stock returns. We moved from the single-factor CAPM (market beta), to the three-factor(...) Market Sentiment and an Overnight Anomaly [Quantpedia]Various research papers show that market sentiment, also called investor sentiment, plays a role in market returns. Market sentiment refers to the general mood on the financial markets and investors’ overall tendency to trade. The mood on the market is divided into two main types, bullish and(...) Climate Change and Asset Allocation [Alpha Architect]This article focuses on “climate-aware” asset allocation and the associated impacts of higher temperatures on equity excess returns and risk. The objective of this research is to demonstrate how portfolios can incorporate climate change risk and rewards into the decision-making process. The(...) New Site: Machine learning for finance - part 2 [Thiago Marzagao]In this series of posts I’m trying some of the ideas in the book Advances in Financial Machine Learning, by Marcos López de Prado. Here I tackle an idea from chapter 5: fractional differencing. the problem Stock prices are nonstationary - their means and variances change systematically over time.(...) Myth-Busting: Money Printing Must Create Inflation [Factor Research]The link between central bank policy, money supply, and inflation seems to have changed QE money printing had no substantial impact on inflation, aside from asset price inflation More direct stimuli might change that INTRODUCTION London ranks ninth on the UBS Global Real Estate Bubble index for(...) Statistical arbitrage risk premium [SR SV]Any asset can use a portfolio of similar assets to hedge against its factor exposure. The factor residual risk of the hedged position is called statistical arbitrage risk. Consequently, the statistical arbitrage risk premium is the expected return of such a hedged position. A recent paper shows that(...) Beta in the tails [Eran Raviv]Every form of strength is also a form of weakness*. I love statistics, but I focus to much on methodology, which is not for everyone. Some people (right or wrong) question: “wonderful sir, but what can I do with it?”. A new paper titled “Beta in the tails” is a showcase application for why(...) The Price Wave Radio [Financial Hacker]Price curves consist of much noise and little signal. For separating the latter from the former, John Ehlers proposed in the Stocks&Commodities May 2021 issue an unusual approach: Treat the price curve like a radio wave. Apply AM and FM demodulating technology for separating trade signals from(...) How Portfolio Construction Impacts the Reliability of Outcomes [Alpha Architect]We are proponents of focused (i.e., 50 stock) long-only value and momentum factor strategies. 1 There are also plenty of incredibly talented systematic investing shops that build highly diversified factor portfolios with 500+ stocks. We take no stance on the "best" approach because there(...) How to Predict Asset Prices (and how not to) [Robot Wealth]If you have some factor that you think predicts future stock returns (or similar) and you are making charts like below, then here are some tips… We’ll go through an example of trying to “time” SPX with the level of VIX. You get daily SPX index prices and daily VIX close data You align them(...) Inflation and the Value Premium [Alpha Architect]The grand experiment of combining massive fiscal and monetary stimulus at a time when the economy is already recovering strongly—the Fed’s latest forecast for 2021 GNP growth is 6.5 percent—has led many investors to begin to worry about the risks of rising inflation. And strong growth is(...) Copula for Statistical Arbitrage: Intro to Vine Copula [Hudson and Thames]Copula is a great statistical tool to study the relation among multiple random variables: By focusing on the joint cumulative density of quantiles of marginals, we can bypass the idiosyncratic features of marginal distributions and directly look at how they are “related”. Indeed, traders and(...) A self optimising moving average [Philipp Kahler]Different markets and different timeframes will need different moving average periods. This article will show a way to construct a self optimising moving average, one which automatically adjusts its period to the charted market and timeframe. Reading a simple moving average I would like to start(...) What cannot be hedged [Quant Dare]When looking to generate appreciable returns and increase diversification, it is natural to consider investing in foreign instruments. Currency risk then comes up, since the returns coming from these funds, stocks, bonds… need to be translated into your home currency. The most straightforward(...) The Fibonacci Timing Pattern - Coding a Reversal Pattern to Trade the Markets [Milton FMR]I am always fascinated by patterns as I believe that our world contains some predictable outcomes even though it is extremely difficult to extract signals from noise, but all we can do to face the future is to be prepared, and what is preparing really about? It is anticipating (forecasting) the(...) Trading and investing performance - year seven [Investment Idiocy]It's April, which means the birds are singing, the trees are leafing, and I'm doing my annual review of my investing and trading performance. The format will be familiar from previous years, but I'm going to be using the fact I've upgraded my live trading system to include a lot(...) Time Machines for Investors [Factor Research]Investors are challenged when evaluating investment opportunities with limited track records Factor exposure analysis can be used to create replication portfolios These empower investors to walk backward and forward in time, enhancing the investment decision process INTRODUCTION Investing is all(...) Where You Can Trade Cryptocurrencies using Fiat Currencies? [Quant at Risk]With a myriad of new crypto-exchanges popping up every quarter, lots of newcomers to this fields can be overwhelmed by their number. Big names can quickly stand out if you filter the list according to daily trading volume or the total number of cryptocurrencies available for trading. Some offer(...) Cryptocurrency Volatility Indexes [Only VIX]Last week I wrote about BVOL - bitcoin volatility index launch on Deribit. However this is not the first crypto volatility index. In fact last year T3 Indexes - the folks behind SPIKES volatility index launched both Bitcoin and Etherium volatility indexes, and already executed trades tied to their(...) The Definitive Guide to Pairs Trading [Hudson and Thames]Born at Morgan Stanley in the late 1980s, under the wing of Nunzio Tartaglia and his team, who later split up to start several of the world’s best hedge funds, namely PDT Partners and D.E. Shaw (which then lead to Two Sigma). Pairs trading has proven to be a popular and sophisticated trading(...) Trend-Following Filters – Part 3 [Alpha Architect]This is the third article in a series of three, the first two are available here and here. Those articles focus on examining from a digital signal processing (DSP) perspective 1 various types of digital filters that are designed to model trends in time series, in order to illustrate their properties(...) Research Review | 9 April 2021 | Bitcoin [Capital Spectator]How Much Bitcoin Should I Own? A Mathematical Answer Adam Grealish (Betterment) March 9, 2021 It goes without saying that this is a hard question to answer. But we can borrow a page from modern quantitative finance to help us arrive at a potential answer. For years, Wall Street “quants” have(...) What P&L Swings Can I Expect as a Trader? [Robot Wealth]Many beginner traders don’t realize how variable the p&l of a high-performing trading strategy really is. Here’s an example… I simulated ten different 5 year GBM processes with expected annual returns of 20% and annualized volatility of 10%. (If you speak Sharpe Ratios, I’m simulating a(...) Adding candlesticks to mean reversion setup in a portfolio [Alvarez Quant Trading]In my previous post, Adding candlesticks to mean reversion setup, we looked at how various candle patterns could help individual trades. Now we will see how those results translate to a portfolio. And why I usually only do portfolio level testing. The Strategy Setup Rules Stock is a member or was a(...) Estimating the Stock-Bond Correlation [Alpha Architect]The correlation between stock and bond returns is an integral component of hedging strategies, risk assessment, and minimization of risk in allocation decisions. In the context of those strategies, the stock-bond correlation is typically estimated using monthly return data over a recent previous(...) Not so soft softmax [OSM]Our last post examined the correspondence between a logistic regression and a simple neural network using a sigmoid activation function. The downside with such models is that they only produce binary outcomes. While we argued (not very forcefully) that if investing is about assessing the probability(...) Bitcoin: An Asset Allocation Perspective [Light Finance]It’s no secret that 2021 has started off well for Bitcoin. Having breached a new all time high of $61,788.45 on March 13th it seems that each passing month brings with it a new milestone, new players, and greater acceptance. Recently, significant news has focused on the pace of institutional(...) Conditional Parameter Optimization: Adapting Parameters to Changing Market Regimes via Machine Learning [EP Chan]Every trader knows that there are market regimes that are favorable to their strategies, and other regimes that are not. Some regimes are obvious, like bull vs bear markets, calm vs choppy markets, etc. These regimes affect many strategies and portfolios (unless they are market-neutral or(...) Fixed Income when you’re Between a Rock and a Hard Place - Part 1/2 [Alpha Architect]Investors are stuck between a rock and a hard place. On one hand, it is painful to buy bonds that deliver paltry yields near all-time lows (Figure 2). On the other hand, many investors’ risk tolerance, compliance guidelines or liabilities preclude them from reducing their fixed income allocations.(...) What is Mutual Information? [Quant Dare]In the field of machine learning, when it comes to extracting relationships between variables, we often use Pearson correlation. The problem is that this measure only finds linear relationships, which can lead sometimes to a bad interpretation of the relation between two variables. Nevertheless,(...) Minimum Profit Optimization: Mean-reversion Trading [Hudson and Thames]In my previous articles, I introduced how to construct long-short asset pairs according to the concept of cointegration and how to build a sparse mean-reverting multi-asset portfolio. Now that we are able to answer the question “what to trade” with confidence, it is time to get down to the(...) An Investigation of R&D Risk Premium Strategies [Quantpedia]A firm as an independent entity is engaged in a wide range of activities that affect its value. While the impact of some activities on the firm’s value is immediate and indisputable, there also exists a variety of activities that might impact the firm’s value in the future, while their outcome(...) How Active Mutual Funds Use ETFs [Alpha Architect]As of 2017, and in spite of the documented negative relationship between fund performance and use of ETFs, approximately one-third of US-domiciled, actively managed mutual funds held ETFs at one time or another. Active managers justifiably make use of ETFs to improve their portfolio management(...) The Market Consequences of Investment Advice on Reddit's Wallstreetbets [SSRN]We examine the market consequences of due diligence (DD) reports on Reddit’s Wallstreetbets (WSB) platform. We find average ‘buy’ recommendations result in two-day announcement returns of 1.1%. Further, the returns drift upwards by 2% over the subsequent month and nearly 5% over the subsequent(...) Market/Volume Profile and Matrix Profile [Dekalog Blog]A quick preview of what I am currently working on: using Matrix Profile to search for time series motifs, using the R tsmp package. The exact motifs I'm looking for are the various "initial balance" set ups of Market Profile charts. To do so, I'm concentrating the investigation(...) More on the Factor Investing Replication Debate [Alpha Architect]There has been a wave of articles (and press) suggesting that academic research suffers from a replication crisis. A “replication crisis” simply means that other researchers are unable to replicate the results from prior research using similar experimental conditions. Psychology seems to be the(...) New Feature: Optimized Model Portfolios [Allocate Smartly]We track more than 60 Tactical Asset Allocation strategies. Members can combine those strategies into what we call “Model Portfolios”. Combining strategies in this way reduces the risk of any single strategy going off the rails and helps to provide smoother, more consistent investment returns.(...) Democratize Quant Conference Recap and Materials [Alpha Architect]COVID is killing conference mojo overall, but we were able to host a short and sweet “Democratize Quant” conference this morning. The speakers were terrific and I personally learned a lot from them. This post is a recap of what we heard and some resources we can make available to the public.(...) In Search of Lost Covered Interest Parity [Quant Dare]The puzzle of Covered Interest Parity (CIP) began in 2008 and has remained as such for many years. There have been multiple attempts to solve the mystery but none of them has reached a complete consensus and the debate is still ongoing. Nevertheless, the discussion has lead to a fair amount of(...) Is There a Replication Crisis in Finance? [Alpha Architect]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 testing of too many factors. For example, Paul Calluzzo, Fabio Moneta, and(...) Modelling Slippage for Limit Orders using Adaptive KDE-based Loss Severity Distribution [Quant at Risk]Placing limit orders for trade execution is both quite popular and handy method in (algo)trading. A trader expects that the executed price of his buy/sell trade will ideally match the one requested in his limit order. Unfortunately, depending on a momentary market/asset liquidity, the difference(...) An Economic Framework for ESG Investing [Alpha Architect]The 2018 Global Sustainable Investment Review reports over $30 trillion invested with explicit ESG goals as of the beginning of 2018. In the words of the authors: There is a clear tendency for many investors to own ethical companies in a saintly effort to promote good corporate behavior while hoping(...) Building a real-time market distress index [SR SV]A new Fed paper explains how to construct a real-time distress index, using the case of the corporate bond market. The index is based on metrics that describe the functioning of primary and secondary markets and, unlike other distress measures, does not rely on prices and volatility alone. Thus, it(...) Conditional Volatility Targeting [Alpha Architect]Financial economists have long known that volatility and returns are negatively correlated. Fischer Black documented this in his 1976 paper “Studies of Stock Price Volatility Changes.” This relationship results in the tendency to produce negative equity returns in times of high volatility. In(...) Research Review | 19 March 2021 | Forecasting [Capital Spectator]Predictable Financial Crises Robin Greenwood (Harvard University), et al. March 2021 Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in(...)