It's easy to forget that virtually all asset classes we hold are priced in US dollar terms. Portfolio valuations are as impacted by the denominator (US dollars) as by the numerator (asset value) Commodity assets like oil and gold are highly (negatively) correlated to US dollar strength. Certain

Countless studies have demonstrated that incorporating feedback loops into life is beneficial. Want to improve at work; seek a mentor. Want to nix that slice; get a swing coach. Want to get in shape; find a trainer. Want to become a better surgeon; get a coach. When left to our own designs,

Portfolio optimization research can be challenging due to the plethora of factors that can influence results, making it hard to generalize results outside of the specific cases tested. That being said, building a robust portfolio optimization engine requires a diligent focus on estimation risk.

Asset allocation is a complex problem that can be solved using endless variations of different approaches that range from theoretical like Mean-Variance to heuristic like Minimum Correlation or even “tactical strategies.” Another challenge is defining an appropriate asset class universe which

Factor exposure analysis can be used to derive factor themes Smart beta ETFs offer relatively low factor exposure It is all about how factors are defined INTRODUCTION The Austrian energy drinks company Red Bull advertised for almost two decades that Red Bull “gives you wings” and improves a

How do you feel when you see the word “statistics”? Maybe you sense that it’s something you should be really good at, but aren’t. Maybe the word gives you a sense of dread, since you’ve started exploring its murky depths, but thrown your hands up in despair and given up – perhaps more

Options-implied volatility of U.S. equity prices is measured by the volatility index, VIX. Options-implied volatility of volatility is measured by the volatility-of-volatility index, VVIX. Importantly, these two are conceptually and empirically different sources of risk. Hence, there should also be

In the last article on Python backtesting, we looked at how to install the Zipline library and get a basic simulation going. But what we did not touch upon was how to get your own data hooked up. If you are reading this, there is a good chance that you take your backtesting and trading simulation

What are the research questions The presence of historical prices impacting future returns, i.e., momentum, has been well researched in the equity market, which we’ve covered here. We’ve also closely looked at momentum in bond markets here, here, and here. What the Bali, Subrahmanyam, & Wen

Vigilant Asset Allocation from Dr. Keller and JW Keuning is one of the most popular tactical asset allocation strategies that we track (click for the full list). The authors’ original paper includes multiple variations of the strategy, based on the number of assets held at any given time and how

This paper investigates whether Tether, a digital currency pegged to U.S. dollars, influences Bitcoin and other cryptocurrency prices during the recent boom. Using algorithms to analyze the blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable

Key Takeaways: Traditional methods of validation and cross-validation are problematic for time series prediction problems The solution is to use a "walk-forward" approach which incorporates new information as it becomes available. This approach gives us a more realistic view of how

This post covers our conversation with Tobias Carlisle, which you can listen to here. 2:09 - Toby starts at the beginning: with school classes that included sheering sheep in Australia. Corey Hoffstein ("CH"): I was so taken aback by this introduction that I was totally caught off-guard. I

I fell in love with k-Nearest Neighbors algorithm at first sight, but it isn’t blind love. I have plenty of reasons to be mad about it. 1. It’s pretty intuitive and simple Given that all you need to do is to compare samples, the Nearest Neighbors (k-NN) algorithm is a perfect first step to

In HIMCO’s May 2018 Quantitative Insight, they publish a figure that suggests the optimal holding length of a momentum strategy is a function of the formation period. Specifically, the result suggests that the optimal holding period is one selected such that the formation period plus the holding

The chart below is from this weekend’s QE subscriber letter. It is one I have updated frequently the last few months. It looks at compound performance of two opposing strategies. The blue line represents a strategy that is invested in the market during weeks that the Fed’s SOMA account value

This is an important article for practitioners because it brings specific investing decisions that are often treated as afterthoughts, to the forefront in style-based investing. The authors propose that decisions made beyond the initial decision to invest in a style, such as value or momentum, are

Portfolios frequently contain stocks representing duplicate factor risks or insignificant weights An optimisation process focused on factor exposure can increase the portfolio efficiency Increasing or decreasing factor exposure requires a view on expected factor performance and risks INTRODUCTION

Most investors have heard the adage "Sell in May and go away" which reflects the common wisdom that markets perform less well during the summer months than during the winter. This anomaly is well described here. Many widely held beliefs go away, precisely because they're widely held

This is the third post in my series on transforming data into alpha. If you haven't yet see the data management and guide to feature engineering, please take a minute to read those first... This post is going to delve into the mechanics of feature selection to help choose between the many

Defensive Asset Allocation (DAA) builds on the framework designed for Vigilant Asset Allocation (VAA) For DAA the need for crash protection is quantified using a separate “canary” universe instead of the full investment universe as with VAA DAA leads to lower out-of-market allocations and hence

One of the big problems for the first formal asset pricing model developed by financial economists, the Capital Asset Pricing Model (CAPM), was that it predicts a positive relationship between risk and return. However, the historical evidence demonstrates that, while the slope of the security market

A couple of weeks back I published the first part of a full-chapter excerpt from my new book, Quantitative Investment Portfolio Analytics In R: An Introduction To R For Modeling Portfolio Risk and Return. Here’s the second half of this two-part excerpt of Chapter 5, which reviews the basics for

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 Adam Butler, which you can listen to here. 1:57 - Corey introduces Adam via a blog post Adam

This is the seventh in my Hedge Fund Hacks series. It is a natural follow-up to my sixth hack on Hedge Fund Return Predictability in which I identified the following conundrum: You need a track record of 8+ years of monthly data to have reasonable confidence in a manager’s expected returns. The

Building profitable portfolios has been giving investment managers headaches for decades. Many approaches have been used up until now, some of the most well-known being Markowitz’s Efficient Frontier and Risk Parity. Today, we are presenting a brand new approach to this recurrent problem developed

Factor portfolios are typically created by equal weighting stocks The impact of single stocks is therefore reduced compared to market-cap weighted indices The FAANG stocks impacted factors differently INTRODUCTION The famous FAANG quintet of Facebook, Amazon, Apple, Netflix, and Google has driven

I looked at the chart for SPY just now, and thought, “Huh…two days in a row that have gapped up. Wonder if that’s significant in any way?” By “gap,” I mean that today’s low was higher than yesterday’s high. When this happens two days in a row, does it mean we should use quintuple

What causes a stock’s price to move? A great question, and one that puzzles most market observers every day. Since this is puzzling, it is an entertaining topic to discuss–enter CNBC and the financial media. In the short-run, stocks prices can move for a variety of reasons … noise trading,

Just about anyone who’s looked at a multi-year chart for a long volatility fund like Barclays’ VXX has thought about taking the short side side of that trade. VelocityShares’ ZIV is an Exchange Traded Product (ETP) that allows you to hold a short volatility position while avoiding some of the

This paper studies the efficiency and price formation of bitcoin and other cryptocurrency markets. First, there are large recurrent arbitrage opportunities in cryptocurrency prices relative to fiat currencies across exchanges that often persist for several days or weeks. These price dispersions

One of the ongoing research projects inside the Robot Wealth community involves an FX strategy with some multi-week hold periods. Such a strategy can be significantly impacted by the swap, or the cost of financing the position. These costs change over time, and we decided that for the sake of more

I was moved to write this by a post on LinkedIn, which you can find here, and which is worth quoting (and thanks to Helder Palaro for pointing me at this): "Volatility tends to “cluster”. Recent high(low) volatility is followed by high(low) volatility in the near-term (ARCH). VT says lever

The paper investigates the following research question: Can machines allocate capital in the classic style of a value investor like Benjamin Graham or Warren Buffett? What are the Academic Insights? By connecting two broad and disparate areas (the innovative AI domain and the more old-fashioned

The rally on Friday was accompanied by a sizable drop in the VIX (and even more so for the VXO, which is the old calculation for the VIX). This triggered some old studies for me in which I noted that big drops in the VXO have had much different connotations depending on whether SPX is in a long-term

Slight positive uptick in the State of Trend Following Performance report last month, leaving the YTD performance in negative territory at half-time. Please check below for more details. Detailed Results The figures for the month are: June return: 0.25% YTD return: -2.67% Below is the chart

Crowded factors exhibit higher drawdowns than uncrowded factors A multi-metric approach can be successfully applied to measure factor crowding Effective in reducing factor drawdowns and volatility, but less meaningful for returns INTRODUCTION Architects devoted to creating large public facilities

With the end of another quarter, the time of performance commentaries is upon us. We generally find most performance commentaries to be devoid of much substance, taking a “heads I’m skilled, tails I’m unlucky” mentality to describing short-term results. While quants may be reluctant to offer

As Warren Buffet once said: “the stock market is a manic depressive.” The market can be full of euphoria and greed one moment, and switch to fear and panic the next. This can often be a time of danger and high-risk for some traders, but for other traders it’s a time of immense opportunity.

Seasonal fluctuations are evident for many commodity prices. However, their exact size can be quite uncertain. Hence, seasons affect commodity futures curves in two ways. First, they bias the expected futures price of a specific expiry month relative that of other months. Second, their uncertainty

In a provocative new book, Lost in Math: How Beauty Leads Physics Astray, quantum physicist Sabine Hossenfelder argues that the scientific world in general, and the field of physics in particular, has repeatedly clung to notions that have been rejected by experimental evidence, or has pursued

June 2018 Trend Following: UP +0.48% / YTD: -6.01% Please find this month’s report of the Wisdom State of Trend Following. Performance is hypothetical. Chart for June: And the 12-month chart: Below are the summary stats: Horizon Return Ann. Vol. Last month 0.48% 13.45% Year To Date -6.01% 15.36%

am a recent Computer Science graduate from IIT Kanpur. I first came to know about QuantQuest through IITK placement cell during our final year placement season. During my mid-semester recess when I was chilling out at my home, I received an email from Ms. Chandini Jain (founder of Auquan) with the

There are many problems that a data scientist encounters when “fighting” financial data for the first time: nothing is normally distributed, most problems are tough (low signal to noise ratio) and non-stationary high-dimensional time series are ubiquitous. In Quantdare we have spoken many times

Recent studies show that volatility-managed equity portfolios realize higher Sharpe ratios than portfolios with a constant notional exposure. We show that this result only holds for “risk assets”, such as equity and credit, and link this to the so-called leverage effect for those assets. In

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

In practice, investors and institutions alike have spending patterns that makes the sequence of market returns a relevant risk factor. All else held equal, investors would prefer to make contributions before large returns and withdrawals before large declines. For retirees making constant

As I wrote before, Bitcoin volatility is quite different from volatility of other assets. I will continue with the same topic here. Bitcoin prices shot up to all-time highs this winter, and have sharply declined since. When an equity index declines, volatility typically moves up, but in the case of

Factor performance in 1H 2018 is comparable to 2017 The Size factor has taken the lead, likely reflecting the threat of global trade wars Value has generated the most negative returns across regions INTRODUCTION We present the performance of seven well-known factors on an annual basis for the last

What are the research questions? Using eVestment, a source of data for asset managers, the authors evaluate U.S. fundamental and quantitative managers, specifically core, growth and value styles. Eighteen strategy types (six in each style) were identified and results calculated using averages for