Since the mid-1990s the dollar exchange rate has mostly anticipated the outcome of FOMC meetings: it appreciated in the days before a rate hike and depreciated in the days before a rate cut. This suggests that since fixed income markets usually predict policy rate moves early and correctly their

This paper examines the link between microeconomic uncertainty and the size premium across different frequencies in an investment model with heterogeneous firms. We document that the observed time-varying dispersion in firm-specific productivity can account for a large size premium in the

As more thematic products come to the market, it can be difficult for investors to decide how to allocate to them, even if they believe in their future potential. The sector disruptors are a suite of products that focus on areas of the economy that are heavily influenced by new technologies. Taking

Trading costs are a hot topic these days. The topic has sparked investor attention because of the rise of systematic factor investing strategies available via the ETF structure. It seems as if everyone is a “quant” these days, slinging money around like drunken pirates, destroying the price

One of the most highly desired properties of any financial model or investment strategy, by investors and managers alike, is robustness. I would define robustness as the ability of the strategy to deliver a consistent results across a wide range of market conditions. It, of course, by no means the

Investors can express factor views via smart beta ETFs or mutual funds Some mutual funds offer higher factor exposure than smart beta ETFs Given higher fees, strong views on expected factor performance are required INTRODUCTION Similar to wind and water eroding the strongest mountains over time,

I am planning a series of posts on the subject of asset volatility and option pricing and thought I would begin with a survey of some of the central ideas. The attached presentation on Modeling Asset Volatility sets out the foundation for a number of key concepts and the basis for the research to

Is there a relationship between real yields and short-term market valuation? Is there a relationship between inflation rates and short-term market valuation? Does the predictive power of the Shiller P/E improve by using yields and inflation? What are the Academic Insights? YES. The authors describe

Even if you’ve never heard of it, the Law of Large Numbers is something that you understand intuitively, and probably employ in one form or another on an almost daily basis. But human nature is such that we sometimes apply it poorly, often to great detriment. Interestingly, psychologists found

Opex week often carries some bullish seasonality. Pullbacks into strong seasonal periods will often offer substantial edges. The study below utilizes this concept and examines pullbacks of at least 3 days just prior to opex week. 2018-08-12-1 Numbers here are strong, and suggest a possible upside

Yield curve models are used to price a wide variety of interest rate-contingent claims. The existence of several different competing methods of curve construction available and there is no single standard method for constructing yield curves and alternate procedures are adopted in different business

In this post, we will learn about the Stereoscopic Portfolio Optimization framework and how it can be used to improve a quantitative trading strategy. We’ll also review concepts such as Gaussian Mixture Models, K-Means Clustering, and Random Forests. Our objective is to determine whether we can

Understanding endogenous market risk (“setback risk”) is critical for timing and risk management of strategic macro trades. Endogenous market risk here means a gap between downside and upside risk to the mark-to-market value that is unrelated to a trade’s fundamental value proposition. Rather

The LNVM model is a mixture of lognormal models and the model density is a linear combination of the underlying densities, for instance, log-normal densities. The resulting density of this mixture is no longer log-normal and the model can thereby better fit skew and smile observed in the market. The

Use of machine learning in the quantitative investment field is, by all indications, skyrocketing. The proliferation of easily accessible data - both traditional and alternative - along with some very approachable frameworks for machine learning models - is encouraging many to explore the arena.

All that began to change around 2000 with the advent of high frequency data and the concept of Realized Volatility developed by Andersen and others (see Andersen, T.G., T. Bollerslev, F.X. Diebold and P. Labys (2000), “The Distribution of Exchange Rate Volatility,” Revised version of NBER

James Paulsen, chief investment strategist at Leuthold Group, sees trouble brewing in the growing disconnect between US equity sectors. He told CNBC earlier this week that correlations among US equities is unusually low and flashing a warning signal. That’s an especially dangerous sign when the

We can decompose the returns process Rt as follows: While the left hand side of the equation is essentially unforecastable, both of the right-hand-side components of returns display persistent dynamics and hence are forecastable. Both the signs of returns and magnitude of returns are conditional

We are looking for 3-4 traders (or trading teams) to showcase as Strategy Managers on our Algorithmic Trading Platform. Ideally these would be systematic quant traders, since that is the focus of our fund (although they don’t have to be). So far the platform offers a total of 10 strategies in

Often a Quantitative Researcher will develop trading models in Python or R. These models are then passed off to Quantitative Developers, who implement them in trading systems with Java or C++. Usually, a Quantitative Trader will then execute trades with the help of these systems. I have had the

The carry factor is the tendency for higher-yielding assets to provide higher returns than lower-yielding assets — it is a cousin to the value factor, which is the tendency for relatively cheap assets to outperform relatively expensive ones. A simplified description of carry is the return an

It has been a busy few months. I have been exploring market indicators that John Ehlers has created which he publicly made available in his book: Cycle Analytics for Traders : Advanced Technical Trading Concepts. The key theme of his book is applying digital signal processing filters to better

This post is the first of a series where we will be providing some of our own thoughts and commentary the conversations we had in the first season of our new podcast. This post covers our conversation with Meb Faber, which you can listen to here. 2:09 - Meb hijacks the show to ask a very important

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. — attributed to Mark Twain. Mark Twain had some great insights. The quote above can apply to just about every aspect of life, including investing. This axiom is particularly relevant

July 2018 Trend Following: DOWN -1.98% / YTD: -7.85% Please find this month’s report of the Wisdom State of Trend Following. Performance is hypothetical. Chart for July: Wisdom State of Trend Following - July 2018 And the 12-month chart: Wisdom State of Trend Following 12 months - July 2018 Below

Slightly positive month for the State of Trend Following, with the YTD slightly negative. Please check below for more details. Detailed Results The figures for the month are: July return: 0.57% YTD return: -2.19% Below is the chart displaying individual system results throughout July: StateTF July

In July 2016, we argued that bond investors should be quick to celebrate the strong returns they had realized year-to-date. The combination of a defined maturity and known coupon rate creates a gravitational pull for bond returns. Using a global bond ETF universe, we develop a simple model to

The simplicity of the Momentum factor can be intellectually challenging Various alternative Momentum versions highlight remarkable similar return profiles The robustness is an attractive characteristic of the investment strategy INTRODUCTION What do selfies, the Kardashians, Crocs, blue cheese, and

While the literature on gold is dominated by studies on its diversification, hedging, and safe haven properties, the question “When to invest in gold?” is generally not analyzed in much detail. We test more than 4,000 seasonal, technical, and fundamental timing strategies for gold. While we find

In their paper “The Probability of Backtest Overfitting” [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2326253] Bailey et al. introduce a method for detecting overfitting. They refer to the method as CSCV or Combinatorially Symmetric Cross Validation. Bailey et al. proceed to show that

Variance swaps are over-the-counter derivatives that exchange payments related to future realized price variance against fixed rates. Variance swaps help estimating term structures for variance risk premia, i.e. market premia for hedging against volatility risk based in the difference between

As we have noted in previous Mathematical Investor blogs (see this blog for instance), surprisingly few mutual funds beat their respective benchmark (typically some market index). Even fewer consistently beat their benchmarks year after year. A new report from S&P Dow Jones sheds light on this

As everyone who’s been invested for the last ten years knows, post-financial crisis stock returns have been incredible. The chart below highlights the total returns for the S&P 500 Index, the MSCI EAFE Index, the MSCI EEM Index, and the MSCI ACWI Index. The results are hypothetical results and

This is a summary of the recent performance of a wide range of excellent tactical asset allocation strategies, net of transaction costs. These strategies are sourced from books, academic papers, and other publications. While we don’t (yet) include every published TAA model, these strategies are

While playing around with a 2 period RSI (Relative Strength Index) mean reversion strategy, I came up with a very simple rule change with a much larger impact on the results than expected. I doubled the compounded annual growth rate and cut the maximum drawdown in half. That never happens. In my

It’s been some time since I last posted so what better way to start than by quantifying and exploring a momentum strategy that was first introduced to me by the good guys at Quantpedia (www.quantpedia.com). If you haven’t heard of this site before, then I encourage you to check it out. For a

As the surge of boomer retirements continues, commentators have given new thought to what safe withdrawal rates are for retirement accounts. The topic is especially significant given two additional factors. First, retirement balances are shockingly low for boomers (Ghilarducci 2015)[1]. Second,

We prefer to think about diversification in a three-dimensional framework: what, how, and when. The “how” axis covers the process with which an investment decision is made. There are a number of models that trend-followers might use to capture a trend. For example, trend-followers might employ a

Most factor investing research is based on long-short stock portfolios Investible risk premia strategies often feature a short index position Trade-off between theoretical alpha and implementation costs & efficiency INTRODUCTION Amundi, a French asset manager, was the first institution to launch

Coined by Rosenthal in 1979, the term file drawer problem refers to the notion that journal editors are biased toward accepting articles that include statistically significant results over those with nonsignificant results. The competition for increasing the citation count and improving journal

Quantpedia contacted me a few months ago and asked if I’d be interested in reviewing their site on my blog. I’m always looking for new ideas for trading systems, so I said “sure!” (Disclosure: they provided me with free account access during the review period.) Quantpedia.com is an

The leverage aversion theory implies that returns to the betting-against-beta (BAB) strategy are predictable by past market returns: An outward shift in investors' aggregate demand function simultaneously increases market prices and increases the expected future BAB return. I confirm the

I recently spotted the following intriguing paper: Market intraday momentum. From the abstract of that paper: Based on high frequency S&P 500 exchange-traded fund (ETF) data from 1993–2013, we show an intraday momentum pattern: the first half-hour return on the market as measured from the

Range forecasts are produced by estimating the parameters of a Geometric Brownian Motion process from historical data and using the model to project a large number of sample paths for the stock price over the coming month and year. For example, this is a range forecast for Netflix, Inc. (NFLX) as at

The statistical term ‘fat tails’ refers to probability distributions with relatively high probability of extreme outcomes. Fat tails also imply strong influence of extreme observations on expected future risk. Alas, they are a plausible and common feature of financial markets. A summary article

This post is a follow-up to the previous one on a simple system for hedging long exposure during a market downturn. It was inspired by H. Krishnan’s book The Second Leg Down, in which he referred to an interesting research paper [1] on the power-law behaviour of the equity indices. The paper

Factor investing research has a long storied past. Fama and French’s 1992 and 1993 papers arguably put factor investing “on the map,” but truth be told, factor investing is an old topic with roots grounded in the so-called arbitrage pricing theory. We have a longer piece on the history of

After the market close on Wednesday, Facebook (FB) released earnings, and the news and future outlook was not viewed well. After closing at an all-time high on Wednesday, it traded down in excess of 25% in the after-hours. So it seems certain it will be opening Thursday with a sizable gap lower. I

This is a follow-up from my FB post last night. Traders that looked to take advantage of a possible bounce from today’s open have seen moderate gains so far today. So what are the chances FB continues to bounce over the next several days and weeks? I re-looked at the study from last night, and