The paper investigates this issue by answering the following research questions: Are commodities returns positive on average? How do they vary in different economic states (backwardation/contango; expansion/recession periods; unexpected inflation) ? How have they contributed to a broad portfolio?

From 1950 to 2018 the S&P 500 performed best from November to April, and significantly worse from May to October during most years. From 1950-2018 the real annualized return for the S&P 500 was 6.71%. Had one only invested from November to April each year the return would have been 6.60%,

A siren was a mythological being who lured sailors with their enchanting music to shipwreck on the rocky coasts of their island. Their songs were almost impossible to resist. But more generally a “siren” is a bad thing that we are attracted to, either physically or psychologically. For

Value investing continues to experience a trough of sorrow. In particular, the traditional price-to-book factor has failed to establish new highs since December 2006 and sits in a 25% drawdown. While price-to-book has been the academic measure of choice for 25+ years, many practitioners have begun

Skewness is a feature of stocks with high firm-risks Stocks with positive or negative skewness outperform the market Can partially be explained by the Size factor INTRODUCTION Many investors started their investment career at an early age, typically buying a stock that showed an enticing performance

We believe there are cause and effect relationships in the world — and in investing — that hold true over time. Many are common sense and easily observable – like fire creates smoke – while others are harder to see and understand. With factor investing, true relationships can be hard to see

FX forward-implied carry is a valid basis for investment strategies because it is related to policy subsidies and risk premia. However, it also contains misdirection such as rational expectations of currency depreciation. To increase the signal-noise ratio FX carry should – at the very least –

Since I was a young lad there has been an ongoing fight in Financial Academia 'n' Industry between two opposing camps: In the red corner are the Utilitarians. The people of classical finance, of efficient frontiers, of optimising for maximum return at some level of maximum risk. In the

Following on from my previous post I have now slightly changed the logic and coding behind the idea, which can be seen in the code snippet below Essentially the change simultaneously optimises, using Octave's fminunc function, for both the gold_x and all currency_x geometric multipliers

Recently, Wes pointed me to this interesting paper by David Rapach, Jack Strauss, Jun Tu and Guofu Zhou: “Dynamic Return Dependencies Across Industries: A Machine Learning Approach.” The paper presents a strategy that forecasts industry returns and shows excellent historical returns. In this

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

One interesting study that I discussed in last night’s subscriber letter considered the fact that SPY left an unfilled upside gap for the 2nd day in a row while closing at a 50-day high. The results table I shared can be found below. 2018-06-05 The size of the follow-through isn’t terribly

Currency hedging is often approached with an all-or-nothing mentality: either full hedging of all foreign exchange (FX) positions or no hedging at all. As a more nuanced alternative, we suggest systematically harvesting the benefits of the FX style factors carry, value and momentum. In particular,

At Robot Wealth we get more questions than even the most sleep-deprived trader can handle. So whilst we develop the algo equivalent of Siri and brag about how we managed to get 6 hours downtime last night, we thought we’d start a new format of blog posts — answering your most burning questions.

Seasonality is an effect that shows up in data but is difficult to justify from a theoretical perspective using behavioral, risk-based, or structural reasoning. However, diving deeper into the effect within the U.S. sectors, we find that seasonality has been economically significant and surprisingly

What are the research questions? Does the Fama-French “size” factor explain the cross-section of stock returns in the Chinese A-share market? Does the Fama-French “value” factor explain the cross-section of stock returns in the Chinese A-share market? What are the Academic Insights? YES. The

With a million dollars to invest today, would you rather buy a portfolio of New York City taxi medallions or shares in Uber stock? When we ask investing audiences this question, the answer is almost always Uber. People tend to think in terms of fundamental growth without also thinking about price.

Equity multiples have been elevated in recent years Using valuation multiples for allocation decisions is a challenging strategy Momentum and volatility-based strategies are more attractive INTRODUCTION In recent years the stock market in the US has been expensive on a variety of valuation

This article is the final project submitted by the author as a part of his coursework in Executive Programme in Algorithmic Trading (EPAT™) at QuantInsti®. Do check our Projects page and have a look at what our students are building. About the Author Xing Tao is a Bachelor in Computer Science

I had the pleasure to hang out with the good folks over at Resolve Asset Management recently. Part of our discussion centered around the differences between our two worlds. As you can imagine, prop trading is fairly different from institutional asset management. A topic of particular interest to

In Financial Risk Management the most challenging part for quantitative modeling is, beyond any doubt, the Operational Risk (Ops Risk). It is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal

Over the past decades developed market exchange rates have displayed two important regularities. First, real exchange rates (nominal exchange rates adjusted for domestic price trends) have been mean reverting. Second, the mean reversion has predominantly come in form of nominal exchange rate trends.

Factor Regressions are one way to ascertain a fund’s exposure to certain factors that an investor/advisor may want to allocate towards, such as Value, Momentum, Quality, etc. Luckily, there are some great free tools available online, such as portfoliovisualizer.com, that allows investors to run

More than 600 finance professionals registered to attend the London Revolution. An excellent group of top finance professionals shared their latest research and experience with big data and machine learning. The event took place on April 24, 2018 at the Banking Hall, one of the most exquisite venues

For many investors, the superiority of passive investing over active investing is axiomatic (Earth to passive investors; Lunch is never free!) And why not? Study after study has demonstrated that only a small portion of actively managed funds beat their benchmarks over long time frames. A recent

The paper investigates this issue by answering the following research questions: Can common robust risk premia (value, momentum, carry and defensive) enhance returns in Fixed Income investing? Do style-based Fixed Income portfolios present diversifying potential? Is a long/short implementation

The choice to lump sum invest (“LSI”) or dollar-cost average (“DCA”) is one fraught with emotion. Intuition tells us that LSI likely offers the best bet for long-term investors as markets, in general, tend to go up. However, can signals derived from simple trend models offer an edge? We find

Happy Memorial Day! The week of Memorial Day has shown some interesting seasonal tendencies over the years. But it has faltered greatly the last few. The chart below is one I have shown in the past, and have now updated. It examines SPX performance from the Friday before Memorial Day to the Friday

I examine whether a short-term reversal is attributed to past intraday or overnight price movements. The results show that intraday returns significantly reverse in the following week, while overnight returns do not, indicating that the short-term reversal is attributed to past intraday price

The Mean-Reversion factor is driven by volatility Allocating tactically when volatility is high generates an attractive payoff profile The strategy can be considered as a tail risk hedge for equity portfolios INTRODUCTION Our most recent research note focused on the Mean-Reversion factor (please see

In the past I have blogged about creating a currency strength indicator ( e.g. here, here and here ) and this post talks about a new twist on this idea. The motivation for this came about from looking at chart plots such as this, which shows Gold prices in the first row, Silver in the second and a

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

Is Fertility a Leading Economic Indicator? Kasey Buckles (University of Notre Dame), at al. March 28, 2018 Many papers show that aggregate fertility is pro-cyclical over the business cycle. In this paper we do something else: using data on more than 100 million births and focusing on within-year

A couple posts ago, I looked at Trading the Equity Curve and found interesting results but nothing that made me decide this works for me. Using the equity curve to decide when to stop trading a strategy just sounds like it should work. But for me it is always about testing. I cannot count how often

In this post, we will create an intraday momentum strategy and use QDA as a means of optimizing our strategy. We’ll begin by reviewing Linear Discriminant Analysis or LDA and how it is associated with QDA, gain an understanding of QDA and when we might implement this technique instead of Linear

There are three universal dimensions of return that drive the performance of all strategies—regardless of investment style or asset class: consistency, magnitude, and conviction. These dimensions serve as levers that can increase or decrease performance of any strategy. They also provide context

Assume you made a decision to invest in an active strategy based on, say, a backtest of the underlying process (to be clear, active means NOT passive market-cap weight in my context). Over the next few years, you sit in the strategy watching it underperform the passive benchmark. You are a

Because of the adaptive nature of position sizing, trend-following strategies can generate the positive skewness of their returns, when infrequent large gains compensate overall for frequent small losses. Further, trend-followers can produce the positive convexity of their returns with respect to

In this post, we’ll take a brief look at biclustering algorithms. They reveal easily interpretable patterns in our data and give us more information about the links between observations and features than simpler clustering algorithms usually do. We’ve already reviewed a number of non-supervised

The authors conduct a comprehensive analysis of five categories of technical trading rules (including channel break rules, filter rules, moving average rules, oscillator rules and support/resistance rules) using aggregate data from the Chinese stock market for the period 1997 to 2015. Do technical

Portfolio construction is a lot like cooking. There are two equally important elements: the ingredients and the recipe. The ingredients are the signals that are used to select investments. The recipe is the set of rules used to transform those signals into portfolio allocations. In factor investing,

Volatility spiked in the first quarter of 2018 when global stock markets declined, which was mainly due to concerns on proposed tariffs by the US government and rising interest rates. Since then markets recovered and volatility declined again, but higher interest rates are likely to have a negative

A new paper combines two key aspects of commodity pricing: [1] a rational pricing model based on the present value of future convenience yields of physical commodity holdings, and [2] the activity of financial investors in form of rational short-term trading and contrarian trading. Since convenience

The Capital Asset Pricing Model (CAPM) indicates returns should go up linearly as beta increases (in other words, risk and return are positively related). However, as I’ve previously discussed, the historical evidence demonstrates that, while the slope of the security market line is generally

The new high in the Russell is notable, since it is the 1st major index to get there. But it does not necessarily mean the other indices will follow. In the study below I looked at SPX performance following instances of a fresh RUT breakout while SPX had still not broken out. 2018-05-17 Whether you

This year’s annual financial research “geekfest,” officially known as the American Finance Association Annual Meeting, assembles the world’s top-tier academic researchers to discuss their latest financial research. Source: Wes’s art studio and a photo by Daniel Cheung If you are looking to

Stocks can be ranked by alpha instead of stock returns Alpha Momentum generates a higher and more consistent performance than Price Momentum Momentum crashes are reduced significantly and risk-return ratios increase INTRODUCTION Alpha in finance is shrinking continuously as investors are getting

Benchmarking a trend-following strategy can be a difficult exercise in managing behavioral biases. While the natural tendency is often to benchmark equity trend-following to all-equities (e.g. the S&P 500), this does not accurately give the strategy credit for choosing to be invested when the

General concepts of Machine Learning 3 types of learning and basic terminology – Supervised learning. Learn a model from labeled training data that allows us to predict future or unknown data. Supervised refers to a set of sample where desired output signals (labels) are already known. Eg spam

The Fed’s System Open Market Account (SOMA is the account at the Fed that contains all of its bond purchase holdings. Fed SOMA data going back to 2003 can be downloaded from the New York Fed’s website. Over this time, there has been a strong relationship between the changes in the SOMA and