Compared to the equity market, the options market is a level up in complexity. For each symbol there are multiple expiration dates, strike prices for each expiration date, implied volatilities, and that's before we get to the option greeks. The increased complexity presents us with more

Tail risk conventionally refers to the risk of a large and sharp draw down of the portfolio. How large is subjective and depends on how you define what is a tail. A lot of research is directed towards having a good estimate of the tail risk. Some fairly new research also now indicates that investors

In spite of several efforts by researchers to overcome the estimation-risk problem (the use of estimate inputs based on sample information as if they were representative of the true population) which produces the so-called “wacky weights”, DeMiguel, Garlappi and Uppal (2009) present striking

Two questions we frequently receive are: “what is global tactical asset allocation?” and “what are style premia (factors)?” In this commentary, we aim to provide a very high-level answer to those questions, incorporating as little math or financial theory as possible and avoiding nuanced

In this article we'll look more deeply at the following iron condor (IC) strategy variations: 38 DTE, 25 pt. wings, 20 delta shorts, 100% stop loss, 50% profit taking 80 DTE, 25 pt. wings, 20 delta shorts, 100% stop loss, 50% profit taking 80 DTE, 75 pt. wings, 12 delta shorts, 200% stop loss,

In his 2012 book, Nicholas Nassim Taleb defined the term antifragile for representing things that benefit from disorder. When this concept is applied to trading, an obvious example can be seen in the relative outperformance of systematic trend following strategies during market crises. In the CTA

In our context, a technical trading indicator can be considered as a combination of a specific technical trading rule with a particular moving average of prices. In two preceding blog posts we showed that there are many technical trading rules, as well as there are many popular types of moving

GMO's latest quarterly commentary is a must read, especially the second half where Jeremy Grantham attempts to model / answer the question "Why Are Stock Market Prices So High?". His first bullet point in the whole piece provides a good summary: Contrary to theory, the market P/E

uly 2017 Trend Following: UP +1.59% / YTD: -15.56% The second half of 2017 starts with a modest gain for our trend following index, while the YTD performance is still well in the red. Below is the full State of Trend Following report as of last month. Performance is hypothetical. Chart for July:

Guest: David Varadi. David is the Co-Founder and Portfolio Manager of QuantX Funds and has been the Director of Research at Blue Sky Asset Management since 2014. Previously, David was the Vice President of Economic Research and Strategic Development for Flexible Plan Investments overseeing

A user commented on ETF Sector Rotation post about a simple idea for trading the sector ETFs, which I can’t believe I have never tried. I like keeping things simple just like my Brazilian Jiu-Jitsu game. Rules If the Select Sector SPDR ETF (XLY, XLP, XLF, XLE, XLV, XLI, XLB, XLK, XLU) is above its

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

This post is a token of appreciation for Faisal Habib who taught us structured products this summer. As commonly known among people who are familiar with leveraged ETFs, the tracking error of those products tend to be larger than what we intuitively expected. This phenomenon has been explored and

The article provides new empirical evidence on the state of market efficiencies in ETFs by studying the following questions: What is the magnitude of the ETF premiums across all US-listed ETFs and all underlying asset class and over time? In particular, what is the magnitude of “true” ETF

So far in this series, we’ve covered faulty benchmark construction, the wide array of fundamental drivers, and the critical importance of quality in cutting through the noise among micro cap stocks. Now, we turn to the largest factor spreads I’ve come across in any segment of the market, real

In keeping with our recent theme of providing useful tidbits of algo trading practicalities, here’s an elegant solution that resolves Yahoo’s unceremonious exit from the free financial data space. Regular readers would know that I use various tools in my algo trading stack, but the one I keep

This is a test of the “Vigilant Asset Allocation” (VAA) strategy from the recently published paper: Breadth Momentum and Vigilant Asset Allocation, by Dr. Wouter Keller and JW Keuning. This is an aggressive momentum trading model, similar in spirit to Keller and Keuning’s popular Protective

Simple rules on macro assets can create very attractive returns. We present a simple trend system and a simple carry system and show how the combination of the two return streams appears very attractive. Summary Trend following in one form or another has been an investment style for decades.

In this new article series QuantStart returns to the discussion of pricing derivative securities, a topic which was covered a few years ago on the site through an introduction to stochastic calculus. Imanol Pérez, a PhD researcher in Mathematics at Oxford University, and an expert guest contributor

The financialization of crude oil markets over the last decade has changed the behavior of oil prices in fundamental ways. In this paper, we uncover the gradual transformation of crude oil from a physical to a financial asset. Although economic demand and supply factors continue to play an important

Designing and managing asset allocation strategies based on factors is promoted in some corners as a better way to build portfolios. Not surprisingly, there’s no shortage of studies that support this view. But the jury’s still out on whether it’s prudent to throw out the standard asset-class

I’m here today to talk about the Stochastic Portfolio Theory (SPT). SPT is a relatively new portfolio management theory. It was first introduced in 1999 by Robert Fernholz. In my opinion, SPT is very attractive for several reasons: it’s theoretical, it’s not very well known and, most

Wednesday is a Fed Day. Fed Days have historically shown an upside tendency. I have documented this tendency in great detail over the years, with the most complete documentation coming in The Quantifiable Edges Guide to Fed Days. Based on what the market did Tuesday, this does not seem to be the

If you ask your typical long-only investor (or financial advisor) how momentum is doing this year they’ll likely say, “Amazing!” This statement will almost surely be based on the fact they own (or know about) the iShares “Momentum Factor” Fund (Ticker: MTUM). MTUM is on fire year to date

The most recent "analysis" seemingly spreading like wildfire across the perma-bear community was performed by Horizon Kinetics in their most recent quarterly commentary. Their claim is that the price-to-earnings of the Nasdaq (or any index really) is much higher than reported because we

What are the research questions? Market globalization is said to be the culprit of decreased benefits of international diversification. In 1995, a US investor investing in Vodafone had exposure to 99% of UK based sales. The same investor in 2012 is exposed to UK sales only for 8% while at the same

Order book imbalance strategies have been a big alpha source in automated market making. Tick by tick observations provide important information about general market sentiment and direction, and high frequency trading firms (HFTs) have been very efficient at trading on this information at very low

Most trading models I see are missing an important concept. It’s not a terribly difficult concept, but it is an important one. It’s not at all strange that most traders, in particular on the retail side, are missing this point. Most trading books skip over it. Most books gloss over it, or just

Calculating an optimal portfolio from a set of capital market assumptions (CMAs) is a straightforward quantitative exercise, but the results are highly dependent on the assumptions holding in the future. Any portfolio that is initially assumed to be optimal will be sub-optimal if any single assumed

In my previous blog post we considered the general weighted moving average. In this post we aim to give an overview of some specific types of moving averages. Specifically, we cover “ordinary” moving averages and mention some examples of exotic moving averages. Ordinary Moving Averages These are

I’ve long been interested in the behavior of corporate insiders and how their actions may impact their company’s stock. I had done some research on this in the past, albeit in a very low-tech way using mostly Excel. It’s a highly compelling subject, intuitively aligned with a company’s

Earlier this year, I attended the Google Next conference in San Francisco and gained some first hand perspective into what’s possible with Google’s cloud infrastructure. Since then, I’ve been leaning on Google Cloud Platform (GCP) to run my trading algorithms (and more) and it has become an

The accuracy of U.S. stock return forecasts based on the cyclically-adjusted P/E (CAPE) ratio has deteriorated since 1985. The issue is not the CAPE ratio, but CAPE regressions that assume it reverts mechanically to its long-run average. Our approach conditions mean reversion in the CAPE ratio on

RCM Alternatives has a great piece (HT Tadas) out outlining what the VIX is, the market for VIX related products, and how to think about volatility as an asset class. It also happens to contain my new favorite quote for anyone thinking about trading volatility: Still, if you cannot see the VIX

In this article Frank Smietana, one of QuantStart's expert guest contributors describes the Python open-source backtesting software landscape, and provides advice on which backtesting framework is suitable for your own project needs. Backtesting is arguably the most critical part of the

What are the research questions? Do variations in aggregate measure of size and activity of sell-side analysts affect the quality of research produced by that industry? Do those same variations in aggregate measures of size and activity of sell-side analysts affect optimism bias in the research

In last week’s commentary, we outline a number of problems faced by tactical asset allocators in actually implementing their views. This week, we explore popular methods for translating a combination of strategic views and tactical views into a single, comprehensive set of views that can be used

This is the third part in a series describing how to approach the creation of a new trading strategy, including everything from idea generation, universe selection, data generation, proper in/out of sample testing, necessary considerations before live trading and the eventual big decision: do I want

Breadth momentum extends traditional absolute momentum approaches for crash protection. Breadth momentum quantifies risk at the universe level by the number of assets with non-positive momentum relative to a breadth protection threshold. Vigilant Asset Allocation matches breadth momentum with a

We study the performance of a comprehensive set of equity premium forecasting strategies that have been shown to outperform the historical mean out-of-sample when tested in isolation. Using a multiple testing framework, we find that previous evidence on out-of-sample predictability is primarily due

Last time, we talked about how to identify stationary time series. Today we continue this line of thought by defining cointegration and looking at its usage in trading. In particular, we will discuss how a pairs trading strategy works. Motivation If we remember that stationarity assumes that a mean

One of the basic principles of technical analysis is that “prices move in trends.” Traders firmly believe that these trends can be identified in a timely manner and used to generate profits and limit losses. Consequently, trend following is arguably one of the most widespread market timing

There have been hundreds of research papers on relative strength momentum since the seminal work by Jegadeesh and Titman in 1993. [1] Relative momentum has been shown to work in and out-of-sample within and across most asset classes. Theoretical results have been consistent, persistent, and robust.

What would you think of a quant strategy that only invests in the most profitable companies? Would it under perform the market or beat the market? If you’re an efficient market person you may think that higher profitability must be priced into equities and therefore at best the strategy would

Continuing from the last post, I will show how using different definitions of passing our out-of-sample test can change our results. How luck can play a role if you use only one strategy to test in out-of-sample. How you split your in-sample(IS) and out-of-sample(OOS) can change results. The

Any frequent reader of our blog knows we are fans of momentum investing. At this point, investment professionals should know that momentum historically works, that momentum is painful, and we have our own opinions on how to implement momentum investing via our Quantitative Momentum Index. Sometimes

We are rather used to reading this disclaimer (or some variation thereof) in mutual fund prospectuses or investment vehicle webpages. Despite warnings, investors and advisors insist on considering past performance (and some other related metrics) as important factors in asset selection. But, are

Newfound specializes in systematic, factor-based approaches to constructing tactical portfolios. While we believe factors like value, momentum, carry, and trend are applicable at the asset class level, care must be taken in designing tactical allocation portfolios. We outline four considerations

What are the research questions? Do factors offer superior diversification benefits relative to assets because factors are less correlated with each other? Does consolidating a larger set of assets into a smaller set of factors reduce noise? Are investors more skilled at relating current information

This article is on the analysis of intra-arrival times of future contract trades, analysing market behaviour, and identification of other particpants’ trading strategy. Intra-arrival time has close relationship with the quantity of each trade. One reason behind this is that many participants use