In our last post, we discussed using the historical average return as one method for setting capital market expectations prior to constructing a satisfactory portfolio. We glossed over setting expectations for future volatility, mainly because it is such a thorny issue. However, we read an excellent

When I was in the Marines we were “voluntold” to read a lot on the history of warfare. This mandate came from General Mattis’ desire that we lean on the 5,000+ years of fighting experience amongst us illustrious humans. Of course, history never tells you exactly what will happen in the future,

In finance, computation efficiency can be directly converted to trading profits sometimes. Quants are facing the challenges of trading off research efficiency with computation efficiency. Using Python can produce succinct research codes, which improves research efficiency. However, vanilla Python

Statistical learning for macro trading involves model training, model validation and learning method testing. A simple workflow [1] determines form and parameters of trading models, [2] chooses the best of these models based on past out-of-sample performance, and [3] assesses the value of the

It’s time to rethink “passive” stock investing. While capitalization weighted U.S. stock indices have delivered good performance over the past decade and the long-term, many investors don’t realize that they can achieve similar returns with much less risk by employing risk-efficient

In a previous post, I simulated S&P 500 drawdowns for perspective on what the current market correction may dispense in the weeks and months ahead. Let’s supplement that analysis by visually comparing the current and ongoing peak-to-market decline with the ten deepest drawdowns since 1950.

You can’t predict the future unless you have a crystal ball but you can predict an asset’s trading price in next time step if you have a right tool and enough confidence in your model. With the development of a new class of forecasting models employing Deep Learning neural networks, we gained

This is the final post in a series aimed at answering three fundamental questions in trading: How should we control risk (first post) How much risk should we take? (previous post) How fast should we trade? (this post) Understanding these questions will allow you to avoid the two main mistakes made

A large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, demonstrates that while past returns do not predict future returns, past volatility largely predicts future near-term volatility, i.e., volatility is

Tactical Asset Allocation (TAA) weathered the storm in March well, significantly paring down losses versus conventional buy & hold. We track 50+ TAA strategies sourced from books, papers, etc., allowing us to draw some broad conclusions about TAA as a style. In the table below we show the March

We are living through unprecedented times. Due to the ongoing global health pandemic, the international markets have plummeted with speeds never seen before, reminiscent of the 1930s and the Great Depression. On February 19, 2020, the SP500 Index closed at an all-time high price and then proceeded

The conventional academic corporate bond puzzle has been that 'risky' bonds generate too high a return premium (see here). The most conspicuous credit metric captures US BBB and AAA bond yields going back to 1919 (Moody's calls them Baa and Aaa). This generates enough data to make it

To say we’re living through extraordinary times would be an understatement. We saw the best part of 40% wiped off stock indexes in a matter of weeks, unprecedented co-ordinated central bank intervention on a global scale, and an unfolding health crisis that for many has already turned into a

The following system helps you identify range bound formations and when to enter and exit such trades. Range bound formations occur when prices bounce back and forth establishing a nearly identical pattern of highs and lows. An upper resistance and lower support level is created. A key point to

There is ample evidence in the literature that stock past returns predict future returns. One of the most comprehensive studies is Moskowitz et al. (2012), which shows that time-series momentum (TSM) is everywhere (they test it on 55 assets). 1 Later studies confirmed the results on even a broader

The VIX has not remained at high levels for long in recent times, theoretically making a mean-reversion strategy attractive However, there were periods historically where volatility stayed elevated for years Furthermore, the VIX is not a tradeable index and related products should be viewed with

About two years ago, we compared and contrasted different approaches to risk managing equity exposure; including fixed income, risk parity, managed futures, tactical equity, and options-based strategies. Given the recent market events as the world navigates through the COVID-19 crisis, we revisit

We’re taking a break from our extended analysis of rebalancing to get back to the other salient parts of portfolio construction. We haven’t given up on the deep dive into the merits or drawbacks of rebalancing, but we feel we need to move the discussion along to keep the momentum. This should

Since my last post, back in late November last year, I have been doing a few disparate things such as: improving the coding of some functions in R to use the Oanda API to automatically download data using cronjobs coding some Octave functions to plot/visualise the above data more work on Random

Figuring out exactly how to score companies on social issues isn’t as simple as tossing around a universal “ESG Ratio” that works for all. Instead, we have to dig into the details and find the nuanced answer to discover which companies are performing and delivering on social issues. This paper

Low-risk investment strategies prefer leveraged low-risk assets over high-risk assets. The measure of risk can be based on price statistics, such as volatility and market correlation, or fundamental features. The rationale for low-risk strategies is that leverage is not available for all investors

There is a saying: “in bear markets correlations go to one.” I wanted to see how true that is for both stocks and a basket of ETFs. Now they don’t go to exactly one, not that I expected that, but they take some large steps towards one. Definitions When calculating correlation, I am using the

The VIX index is an important market indicator that everyone is watching. VVIX, on the other hand, receives less attention. In this post, we are going to take a look at the relationship between the VIX and VVIX indices. While the VIX index measures the volatility risks, VVIX measures the

DIY tactical asset allocation (i.e. the types of public strategies that we cover on this site) has been strong through this crisis. Tactical ETFs on the other hand have struggled badly. We track 50+ DIY TAA strategies, allowing us to draw some broad conclusions about TAA as a style. In the graph

The widespread disruption from the coronavirus pandemic is obvious to everyone, but economic nowcasting and forecasting models are only just beginning to reflect the damage to what had been a moderately expanding US economy. Thanks to the lag in economic data, which can arrive with as long as two to

If you have a relative working in the banking industry, ask the person what annoys him/her most about the job. You will surely receive an answer that is related to the task of data entry i.e. the practice of manually entering serial numbers and names from financial documents into the bank’s

The dramatic underperformance of the value premium since 2018, among the largest drawdowns in history, has led many to question its existence. It is certainly possible that what economists call a “regime change” could cause assumptions for why the premium should exist/persist to have changed.

Actual situation on financial markets changes extremely fast. At the time we are writing this blog post (Monday morning at 23rd of March) we have End-of-Day data to Friday’s close (20th of March) and a few hours of trading action from Monday and VIX currently stands over 70. Markets are in

The US stock market tumbled again yesterday, falling to a 3-1/2-year low, thanks to expanding coronavirus threat. The economic outlook is grim, at least for the near term, and so the market is attempting to price in this stark change. The result, not surprisingly, is a sobering, rapid fall from

Tactical Asset Allocation (TAA) as a whole continues to weather the fallout well, significantly paring down losses versus a conventional buy & hold portfolio. Individual strategies vary widely. We track 50+ published TAA strategies, allowing us to draw some broad conclusions about TAA as a

In this research note, we explore the performance of simple trend equity strategies and funds in the recent market rout. We find a significant dispersion in realized performance, with some strategies shifting entirely to cash at the end of February and some remaining entirely invested. We explain

In this post, we will learn about Markov Model and review two of the best known Markov Models namely the Markov Chains, which serves as a basis for understanding the Markov Models and the Hidden Markov Model (HMM) that has been widely studied for multiple purposes in the field of forecasting and

Thematic investing can be viewed as performance chasing with a narrative A systematic approach to thematic investing would have underperformed the stock market Thematic hedge fund managers have not generated attractive returns PERFORMANCE CHASING WITH A NARRATIVE? Thematic investing is like venture

The Cboe’s VIX®, VIX3Msm (93-day), and VIX6Msm (184-day) indexes enable us to quantify volatility term structures but until now, historical analyses between VIX style indexes have been limited to dates after December 2001 in the case of VIX3M and January 2008 for VIX6M. This post introduces the

This crisis is bringing out the best in many people. When the stakes become real, alertness is heightened, thinking is crystallized. Here is an eclectic collection of thought pieces we’ve enjoyed over the past two weeks. Bin There Done That by Morgan Stanley Ample research shows that most experts

Our last post on rebalancing struck an equivocal note. We ran a thousand simulations using historical averages across different rebalancing regimes to test whether rebalancing produced better absolute or risk-adjusted returns. The results suggested it did not. But we noted many problems with the

Loss aversion means that people are more sensitive to losses than to gains. This asymmetry is backed by ample experimental evidence. Loss aversion is not the same as risk aversion, because the aversion is disproportionate towards drawdowns below a threshold. Importantly, loss aversion implies that

Many investment strategies use the mean like an official parameter. However, this estimator can be considered non-robust, being easily affected by outliers. But if we take a look at almost any financial series, we will notice that outliers may appear more often than we might think. Introduction In

Consistent with misapprehensions expressed during other recent market crises, there has been a chorus of alarmist speculation about the actions and state of risk-parity strategies during the current crash. We felt it would be helpful to revisit the concept of risk parity and take a snapshot of how a

What are the Research Questions? Planning for the expenditures needed to fund a successful retirement is one of the most important tasks individuals face, and it’s not an easy one. In fact, it is pretty common (and smart) for some investors to turn to a professional advisor to help guide them

The last few weeks have been some of the toughest in recent memory for investors, as we have observed an intense global market selloff that began in late February and continued into early March of 2020 (as of the writing of this report). Equity markets have experienced the steepest losses since

This is the article we had prepared around 1-2 weeks ago (data sample starts in October 2014 and ends on 4th of March 2020). But then coronavirus hit our country (Slovak Republic), and we were doing a lot of crisis management tasks and therefore were not able to publish it on time. Now, after the

Developer: Etienne Botes and Douglas Siepman. Source: The Vortex Indicator. Stocks & Commodities, January 2010. Concept: Momentum trading strategy based on Vortex Indicator. Research Goal: Performance verification of momentum signals. Specification: Table 1. Results: Figure 1-2. Trade Setup:

Hard currency emerging market debt outperformed local currency EM debt since 2013 EM government and corporate debt traded comparably Adding EM debt to a traditional US equity-bond portfolio would have generated only marginal benefits INTRODUCTION Forecasting the short-term outlook for the S&P

In his article in the S&C April 2020 issue, Vitali Apirine proposed a modified On Balance Volume indicator (OBVM). The hope was that OBVM crossovers and divergences make great trade signals, especially for stock indices. I got the job to put that to the test. The original OBV indicator was

I know this topic is addressed on a very regular basis on the web but I’m pretty sure sharing my experience will help some finance people. I’m currently working on Limit Order Book modeling. This means dealing with fairly big data sets. I have around 1 million observations per stock and per day.

Back in the rebalancing saddle! In our last post on rebalancing, we analyzed whether rebalancing over different periods would have any effect on mean or risk-adjusted returns for our three (equal, naive, and risky) portfolios. We found little evidence that returns were much different whether we

If an investor would state today that in ten or twenty years most portfolios would include an allocation to cryptocurrencies, they would likely be laughed at. However, a similar response would have been encountered in the Internet Bubble and someone proposed to invest in low-risk stocks. During that

Broadly speaking, Tactical Asset Allocation has weathered this storm reasonably well, but the last two days have been tough and we are by no means out of the woods. We track 50+ published TAA strategies, allowing us to draw some broad conclusions about TAA as a style. In the table below we show the

The vector autoregression (VAR) framework is common in econometrics for modelling correlated variables with bi-directional relationships and feedback loops. If you google “vector autoregression” you’ll find all sorts of academic papers related to modelling the effects of monetary and fiscal