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

I was fortunate enough to talk about my latest open source work with Brian Peterson at the R/Finance conference in Chicago just less than 1 month ago. It was my first time to the conference, and I will be back again for sure. The topics and their presentations are available on the website. With this

As many readers of this blog are aware, on this weekend I will be doing a 150 mile bike ride from Boston, MA around Cape Cod to its tip in Provincetown for the Multiple Sclerosis Society. I have offered anyone that donates any amount of money a copy of the QE Fed Day MS Ride package, which includes

In his famous book "Thinking, Fast and Slow", the Nobel laureate Daniel Kahneman described one common example of a behavioral finance bias: "You are offered a gamble on the toss of a [fair] coin. If the coin shows tails, you lose $100. If the coin shows heads, you win $110. Is this

Here is a link to our podcast on Flirting with Models. Today I am speaking with Jack Vogel, co-CIO of boutique ETF issuer Alpha Architect. I’ve known Jack for some time now and was particularly excited to bring him on the show for two reasons. The first, which you will quickly learn in the

On Wednesday the bulls tried to make a move higher and failed, making for a higher high and a lower close. On Thursday the opposite happened. The bears failed in their attempt at a move lower. A study from the Quantifinder looked at 2-day moves like this. I found results to be substantially

I began my investment career in 1974. In 1976 I left a large retail brokerage firm to join a premier investment bank. I had both retail and institutional clients. So I had a well-rounded knowledge of Wall Street. The 1970s was soon after the dark ages of investing. Modern portfolio theory existed in

When Does Cap-Weighting Outperform? Factor-Based Explanations Roger G Clarke (Ensign Peak Advisors), et al. May 1, 2018 Equity mutual fund performance can be partially explained by commonly-followed equity market factors, and the proposition that fund managers in the aggregate have more

Reliable data makes for more accurate models. It is not the end of the world if there are minor discrepancies although data does need to be representative to build models and make good assumptions. Common data errors are known to be found at market closing times. We want the auction price not the

Here’s an excerpt from my new book, Quantitative Investment Portfolio Analytics In R: An Introduction To R For Modeling Portfolio Risk and Return, which was published last week. In this two-part excerpt of Chapter 5, we’ll look at a basic procedure for downloading factor premia from Professor

The superior performance of low-beta and low-volatility stocks was documented in the literature back in the 1970s — by Fischer Black (in 1972) among others — even before the size and value premiums were “discovered.” The low-beta/low-volatility anomaly has been demonstrated to exist in

For those of us working with time series, the autocorrelation function (ACF) is a fundamental tool to understand how the values in a series correlate with others certain distance away. Indeed, we could even say that autocorrelation plots (a.k.a correlogram) are probably the most common

I am frequently asked what data provider I use and recommend for stocks. I have been using Norgate Data for four years and recommend them to anyone looking for data. This review will focus on US Stocks and AmiBroker integration which is what I use daily. Norgate Data has data for the Australian and

It's finally here: the first season of the Flirting with Models podcast, the show that aims to pull back the curtain and meet the people who design, develop, and manage quantitative investment strategies. This season – titled Boutiques & Bloggers – is a series of conversations with

The yearly R in Finance conference is one of my favorites: 1. Titans of the R community are there every year. This year the founder of Rstudio (but much more really), JJ Allaire was a keynote speaker. He gave a talk about Machine Learning with TensorFlow and R. 2. Single track. I like everything,

The Value factor has generated flat returns over the last decade, which has been challenging for the most dedicated Value investors. Given that the average mutual fund holding period is three years, investors might question if the Value factor has become a contrarian call, which arguably makes it

Farre-Mensa and Ljungqvist (2016) observe that many measures of financial constraints used in the literature are flawed. In fact, to date, it remains an empirical challenge to quantify them. The authors attempt at solving this problem by answering the following research questions: Can textual

In order for active management to outperform passive investing, a manager needs both skill and opportunity. Opportunities can come in the form of entering and exiting the market, security selection, and portfolio construction. However, even if these opportunities can be quantified, developing a

Initial coin offerings (ICOs), sales of cryptocurrency tokens to the general public, have recently been used as a source of crowdfunding for startups in the technology and blockchain industries. We create a dataset on 4,003 executed and planned ICOs, which raised a total of $12 billion in capital,

The VIX futures curve reflects expectations of future implied volatility of S&P500 index options. The slope of the curve is indicative of expected volatility and uncertainty relative to volatility and uncertainty priced in the market at present. Loosely speaking, a steeply upward sloped VIX

As a native Philadelphian and huge basketball fan, I fully agree with the 76ers fan’s rally cry — Trust the Process. Even the players, such as Joel Embiid, have echoed the sentiment of the fans: For those not in Philly and not too familiar with the NBA, “Trust the Process” explains the 76ers

Lawrence Hamtil recently shared a Vanguard paper with me that was surprising given it indicated the trailing twelve month price-to-earnings ratio "TTM P/E" was nearly as strong a predictor of forward 10-year equity returns as the cyclically adjusted price-to-earnings "CAPE" ratio

Higher moments such as Skewness and Kurtosis are not as explored as they should be. These moments are crucial for managing portfolio risk. At least as important as volatility, if not more. Skewness relates to asymmetry risk and Kurtosis relates to tail risk. Despite their great importance, those

Momentum trading strategies span a diverse range of trading ideas. Often they will use indicators to determine the recent underlying trend and try to gauge the strength of the trend using measures of the rate of change in the price of the asset. One very simple momentum concept, a strategy in

Most papers in the financial literature estimate the p-value associated with an investment strategy, without reporting the power of the test used to make that discovery. This is a mistake, because a particularly low false positive rate (Type I error) may be achieved at the expense of missing a large

Quantitative Investment Portfolio Analytics In R: An Introduction To R For Modeling Portfolio Risk and Return rolled off the presses earlier today for the first time. The book is currently available as a softback title. Stay tuned for details on an upcoming Kindle version. Meantime, after nearly

The Momentum strategy can be applied to stocks, sectors and countries Sector and country Momentum portfolios generate positive excess returns However, cross sector & country and single stock Momentum portfolios generate higher risk-return ratios INTRODUCTION When a graduate joins the M&A

What are the research questions? The authors propose and test an enhanced Shiller model that incorporates macroeconomic conditions, by modeling real bond yields and volatility, equity volatility and inflation, in a 2 step approach to forecasting equity returns. The underlying thesis is that the

Buffett’s alpha over the past 38 years has been an astounding 10% annualized, making him a prime example of investment discipline and skill. Through a statistical lens, the probability of having a track record this solid is extremely small. However, given enough investors mimicking Buffett’s

I noted a few years ago here on the blog that the week after June options expiration has done especially poorly in recent years. The table below is updated and shows all such weeks dating back to 1999. 2018-06-18 Those are some pretty weak numbers. Below is a 5-day profit curve. 2018-06-18-2 As you

There is often a strong case for hedging FX carry trades against unrelated global market factors. It is usually not difficult to hedge currency positions – at least partly – against global directional risk and against moves in the EURUSD exchange rate. The benefits of these hedges are [1] more

IEX is a relatively new exchange (founded in 2012). For our purposes, what makes them different from other exchanges is they provide a robust FREE API to query their stock exchange data. As a result we can leverage the pandas-datareader framework to query IEX data quite simply. WHY PARQUET?

This study analyzes how the determinants of mutual fund investor cash flows have changed over time, and the associated impact on investor returns. Using data from 1992-2016 we find that investor return-chasing behavior essentially disappeared starting in 2011. Investor flows have become more

There is some popular marketing spin going around that indexing—constructing portfolios based on market-cap weights—is effective because it allows an investor to own more of companies that have been successful and appreciated, while moving away from losers that have been unsuccessful and

In the past, we have examined the following two topics: (1) stock performance & the 52-week high and (2) the investment CAPM. When examining the performance of stocks relative to their respective 52-week high (highlighted by us here), the authors (George and Hwang) find the following: When

Later this month I’ll be publishing my third book: Quantitative Investment Portfolio Analytics In R: An Introduction To R For Modeling Portfolio Risk and Return. Although there are already many R books on the market, this one serves a particular niche: a short guide for recovering Excel addicts

Positive May return for the State of Trend Following, with a YTD performance slightly negative. Please check below for more details. Detailed Results The figures for the month are: May return: 1.48% YTD return: -2.38% Below is the chart displaying individual system results throughout May: StateTF

Last year Quantifiable Edges readers helped me raise over $4000 for Multiple Sclerosis (MS), and this year I am upping the incentive for people to donate! I am happy for any size donation, but I have created 2 donation levels this year so that people are incented to give more: Thank You Level: One

From my time with working with Larry Connors, I have become known for using the 2-Period RSI (RSI2) (Relative Strength Index) in my trading. I have written lots of blog posts that use it and I often use it in my personal strategies. One thing I like to do with indicators that I use frequently is a

This is the sixth in my Hedge Fund Hacks series. In this post, I hammer home how little we know about the expected returns of a hedge fund or a managed futures strategy because we have so little data. You will learn just how large the uncertainty is and what you can do about it. Glimpses Through the

A new video has been produced by the Mathematicians Against Fraudulent Financial and Investment Advice (MAFFIA) group. It explains, in simple terms, how many of the financial strategies and funds available today are based on a statistically dubious foundation, typically rooted in selection bias

Cryptocompare is a platform providing data and insights on pretty much everything in the crypto-sphere, from market data for cryptocurrencies to comparisons of the various crytpo-exchanges, to recommendations for where to spend your crypto assets. The user-experience is quite pleasant, as you can

This post focuses on Chapter 3 in the new book Advances in Financial Machine Learning by Marcos Lopez De Prado. In this chapter De Prado demonstrates a workflow for improved return labeling for the purposes of supervised classification models. He introduces multiple concepts but focuses on the

In this post we will estimate the Hurst exponent using the R/S method. The Hurst exponent determines the long range memory of a time series (more below). If a series has no memory ie if each point in time is independent from previous points in time then its said to be more of a random process.