A lot of research has been devoted to answering the question: do options price in the volatility risks correctly? The most noteworthy phenomenon (or bias) is called the volatility risk premium, i.e. options implied volatilities tend to overestimate future realized volatilities. Much less attention

2018 was negative for classic multi-factor portfolios Low Volatility generated the best and Value the worst performance Factor performance was homogenous across global markets INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years, including 2018.

I am building a small Domain Specific Language (spreadsheet style calculations) called FlatLang with some interesting properties. These are my notes. ~ FlatLang is a functional, pure, total, statically typed language. To simplify, 1) (almost) everything is a function 2) each function's

Happy New Year! In case you missed them, here were our most popular posts in 2018: Extended Backtest of Global Equity Momentum My book had dual momentum results from 1974 through 2013. With the acquisition of additional data, we are now able to show results back to 1950. We also explain why 1950 is

As 2018 comes to a close, we are thankful for all those who have read, commented upon, and shared the research that we have published this year. This year, we wrote 53 new research commentaries, averaging north of 3,000 words per piece. And we hope our approach of accessible and thoughtful

The constant leverage myth is busted: there is no spoon natural decay. DAA’s fast protective momentum approach successfully detects lower volatility regimes with higher streak potential. Smart leverage through a clever separation of signals and trades can achieve considerable outperformance even

The last day of the year used to be consistently bullish for the market. But that has changed since the turn of the century. This is true across a number of indices. The most dramatic example is the NASDAQ, which I highlighted here on the blog a few years ago. I have updated the chart below.

Each time S&P Dow Jones Indices publishes its latest Active Versus Passive Scorecard, the persistent failure of the vast majority of actively managed funds to outperform is highlighted. The evidence on this failure led Charles Ellis to call active management the loser’s game — while it’s

A theoretical paper shows that a downward shift in expected inflation increases equity valuations and credit default risk at the same time. The reason for this is “nominal stickiness”. A slowdown in consumer prices reduces short-term interest rates but does not immediately reduce earnings growth

A bull market can be a fragile thing. To paraphrase Hemingway, there are two ways that investing profits can turn into losses: gradually, then suddenly. The latter profile applies to the latest adjustment in the S&P 500’s current drawdown. As recently as early October, the US stock market’s

Are premium toys attractive alternative investments? In their April 2018 paper entitled “LEGO – The Toy of Smart Investors”, Victoria Dobrynskaya and Julia Kishilova study LEGO sets as an alternative investment. A secondary market for these sets with 10,000+ daily transactions, affordable to

Six recent asset allocation articles (tactical or otherwise) that you might have missed: 1. Trend Following on Steroids (Wouter Keller via Alpha Architect) Wouter Keller details his latest tactical model: “Defensive Asset Allocation”. We track a number of strategies from Dr. Keller and his

This week’s commentary is a short addendum to last week’s piece, attempting to serve as a (very) brief and simplified summary of process diversification. Volatility is only one way of measuring risk; dispersion in terminal wealth is another. Using simulations of dart-throwing monkeys, we plot

In 2018 we published more than 50 research notes and 4 white papers on mainly factor investing, but also on other topics like zombie stocks, replicating private equity returns, statistical arbitrage, and mutual fund performance chasing. We would like to thank you for reading and always appreciate

Every once in a while I come across a study that reminds me an awful lot of Longfellow’s “The little girl”. 2018-12-23-2 After the strong and persistent selling over the last few days I decided to examine other times like now where the SPX dropped at least 1.5% for 3 days in a row. The study

There are reason and evidence for financial markets failing to be efficient with respect to macro trends. The main reason is cost: “tradable” economic research is expensive and investment firms will only invest in such research if their fees on expected incremental portfolio returns exceed their

This holiday season, ReSolve is offering a gift in podcast-form: a 12-episode mini-series, where we will explore, from first principles, timeless investment wisdom that will help you maximize your long-term success. From universe selection to portfolio construction, our aim is to offer you a

In the last post in our machine learning series, we showed how nonlinear regression algos might improve regression forecasting relative to plain vanilla linear regression (i.e., when underlying reality is nonlinear with complex interactions). In this piece, we’ll first review machine learning for

“Diversification is the Only Free Lunch” I’m sure everyone has heard this old adage at some point in their trading career. Most people probably shrug it off and go back to watching The Big Short and dreaming of putting on that one career-making trade. Or maybe they’re still trying to figure

As I have mentioned in several interviews, I am always looking for new strategies. One area that fascinates me is stock options. Because it is difficult to get good data and to do backtests, I believe that there are good edges here to be found. A few weeks ago, I found myself with lots of time and

While there have been a few cyclical periods of rising rates over the past 40 years, we've largely been in one large downtrend... meaning that it has consistently paid to own bonds vs cash / take duration risk for nearly my / many investment lives. Now that we've moved away from a zero

A game of cat and mouse. Technological development more often than not stays ahead of regulators. Each new technological advance or disruption carries risks for the stability of things and advantages for those who are at the forefront. Regulators try to set rules and good practices that limit

What are the Research Questions? This editorial introduces data science to the wider investment community and highlights some of the advantages (and potential pitfalls as discussed yesterday) it can bring to everyday investment practice. The paper answers two apparently simple questions: What is

The US stock market is the largest and most liquid stock market in the world and tends to get all the attention. Many brokers and trading platforms are US-only, and many traders focus exclusively on the US market. This post compares the number of stock listings in each of 17 countries to quantify

Portfolio risk is often measured as the variance of returns over time. Another form of risk is the variance of terminal wealth that can arise from small variations in strategy inputs or asset returns. Strategies or portfolios that are more sensitive to small changes in inputs are inherently

This research note was originally published by the CAIA Association’s AllAboutAlpha blog. Here is the link. SUMMARY Common equity factors generated attractive risk-adjusted returns in the Chinese stock market Factor performance in China often mirrors global factor performance Indicates common

What are the Research Questions? Data mining in finance has long been a concern for academic researchers. Campbell Harvey, one of the authors on this paper, is leading the effort to ensure the integrity of empirical finance research. For example, see here for a post on his address to the AFA. The

This week Ryan and I discuss two posts. First, we examine a guest post by Matthew Bartolini of State Street Global Advisors, discussing the underperformance of Value and its outlook for 2019. Second, we examine a guest post by Elisabetta on a recent JPM paper examining the effects that ETFs have had

Machine learning offers powerful tools for backtesting trading strategies. However, its computational power and convenience can also be corrosive for financial investment due to its tendency to find temporary patterns while data samples for cross validation are limited. Machine learning produces

This post is all about handcrafting; a method for doing portfolio construction which human beings can do without computing power, or at least with a spreadsheet. The method aims to achieve the following goals: Humans can trust it: intuitive and transparent method which produces robust weights Can be

Over several time horizons op-ex week in December has been the most bullish week of the year for the SPX. The positive seasonality actually has persisted for up to 3 weeks. I’ve shown the study below in the blog many times since 2008. It looks back to 1984, which was the first year that SPX

Below I provide a vectorised Octave function to estimate the bid-ask spread from high, low and close prices according to "A Simple Way to Estimate Bid-Ask Spreads from Daily High and Low Prices," (Corwin and Schultz, 2012). The paper can be downloaded from one of the author's homepage

In this blog on random walk simulation, we will learn how to simulate stock prices. Future stock prices are very hard to predict and are dependent on the past trend and volatility. While simulating the stock prices one has to give reasonable weightage to these two parameters. The random walk model

As a follow-up to “Sunspot Cycle and Stock Market Returns” a reader asked: “Sunspot activity does have a direct relationship to weather. Could one speculate on the agriculture market using the sunspot cycle?” To investigate, we relate sunspot activity to the fairly long U.S. Producer Price

A reader asked whether Charles Nenner, self-described as “the talk of Wall Street since accurately predicting some of the biggest moves in the Markets over the past few years,” accurately forecasts equity and commodity markets. We consider the following: In his July 2007 discussion of the

Update: I updated the code so it works with Oanda's new API. Get it here Time to talk about brokers, how to place a trade programmatically and most importantly how not to get scammed. This is the third part of the series: How to build your own algotrading platform. A broker is nothing more than

In line with the previous post Group Funds with the Sun we continue exploring new ways to visualise and analyse financial data. We will take annual data from the current components of Dow Jones Industrial with data going back to 2000 to play around. Animated Risk – Return scatter Risk-Return

We can see thinking machines taking over more and more human tasks, such as car driving, Go playing, or financial trading. But sometimes it’s the other way around: humans take over jobs supposedly assigned to thinking machines. Such a job is commonly referred to as a Mechanical Turk in

Borne in academia and raised by fund managers seeking to outperform, value style mutual funds and ETFs today hold close to $2 trillion(1). But with poor returns over the past decade, the question of whether “value is dead” has become a popular topic of conversation.(2) The search term “is

What are the Research Questions? The paper investigates the following research question: Have ETFs flows affected the correlation structure of returns? Have ETFs flows affected the liquidity of underlying securities? Have ETFs flows affected the ability of managers to generate alpha? What are the

The risk-free rate is an important concept in financial theory, but the risk-free rate accessible to most investors can vary significantly in level. The variation in risk-free rate not only has an important impact on the theoretically optimal portfolio, but it can have a very real impact upon

Equity factors exhibit sector biases and exposures to other common factors A factor optimisation process allows investors to create pure factors Risk-adjusted returns do not increase, but pure factors are attractive from analytical, risk and allocation perspectives INTRODUCTION When large quantities

Across assets, carry is defined as return for unchanged prices and is calculated based on the difference between spot and futures prices (view post here). Unlike other markets, commodity futures curves are segmented by obstacles to intertemporal arbitrage. The costlier the storage, the greater is

The title of this post is not original and draws from Nate Silver's book on why so many predictions in politics, sports and economics fail. It reflects the skepticism with which I view many 'can't fail" predictors of economic growth or stock markets, since they tend to have

This post is all about handcrafting; a method for doing portfolio construction which human beings can do without computing power (although realistically you'd probably need a spreadsheet unless you're some kind of weird masochist). The method aims to achieve the following goals: Humans can

Trend following is well-known and the simplest version is as follows: you buy an asset when it has positive momentum (the price goes up) and you sell it and go to cash (or any other safe haven) when the momentum turns negative.(1) The best-known example of trend following is on the monthly ETF SPY

The SPX could complete a “Death Cross” formation today or tomorrow, in which the 50-day moving average crosses below the 200-day moving average. In the past I have looked back to 1960 when examining Death Crosses. This time I decided to use Amibroker with my Norgate database, which goes back to

You can watch the video via the link below: This week Ryan and I discuss three posts. First, we examine a guest post titled, “Trend Following on Steroids,” which examines ways to enhance a simple trend-following strategy. Second, we examine a post I wrote regarding how to use trend-following

In my previous article, we have developed a simple artificial neural network and predicted the stock price. However, in this article, we will use the power of RNN (Recurrent Neural Networks), LSTM (Short Term Memory networks) & GRU (Gated Recurrent Unit Network) and predict the stock price. We

I've talked around a type of portfolio construction called "Handcrafting" for some time now, in both of my first two books, and in the odd blog post. I thought it would be useful to explain how the technique works in a more thorough and complete series of blog posts, and also share