Quant Mashup Cross-Asset Signals and Time Series Momentum [Allocate Smartly]This is a test of concepts from the paper Cross-Asset Signals and Time Series Momentum. Standard “time series” momentum is a well-documented feature of financial markets. Assets going up tend to continue going up. In this paper, the authors show that stocks and treasuries can be used to time(...) The Probabilistic Sharpe Ratio [Portfolio Optimizer]The Sharpe ratio1 is one of the most commonly used measure of financial portfolio performance, but because it is deeply rooted in mean-variance theory, its usage with return distributions deviating from normality (e.g. hedge funds, cryptocurrencies) is frequently questioned2. One solution to this(...) Three Factor ETF Rotation Strategy [Alvarez Quant Trading]I am drawn to ETF rotation strategies. What likely draws me to them is that in general, these are simple strategies that do not trade that often. My goal with these strategies is to match buy and hold with less drawdown. What follows is a strategy I have known about for a while and tested but never(...) Adversarial examples and quant quakes [Alex Chinco]Imagine you’re a quantitative long-short equities trader. If you can predict which stocks will have above-average returns next period and which will have below-average returns, then you can profit by buying the winners and selling short the losers. Return predictability and trading profits are two(...) The Short-Duration Equity Premium [Alpha Architect]The objective of research into asset pricing is to determine which characteristics are most important for predicting returns and then build simplified models using as few factors as possible—to tame the so-called “zoo of factors”—while still providing a high level of explanatory power. In(...) NEW Contributor: Multivariate GARCH with Python and Tensorflow [Sarem Seitz]In an earlier article, we discussed how to replace the conditional Gaussian assumption in a traditional GARCH model. While such gimmicks are a good start, they are far from being useful for actual applications. One primary limitation is the obvious restriction to a single dimensional time-series. In(...) Optimal Allocation to Cryptocurrencies in Diversified Portfolios [Artur Sepp]Cryptocurrencies have been acknowledged as an emerging asset class with a relatively low correlation to traditional asset classes. One of the most important questions for allocators is how much to allocate to Bitcoin and to a portfolios cryptocurrency assets within a broad portfolio which includes(...) Analyzing U.S. election cycle seasonality in the S&P 500 [Quant Dare]Everyone is aware of the importance of the U.S. elections and we take it for granted that, like many other things, financial markets will end up being affected in some way. But have you ever wondered if there is any seasonality throughout those elections that we can take advantage of when making(...) Momentum - a separate factor or does it subsume stock risk? [Alpha Architect]Breaking new ground, the authors present a novel view on the nature and source of “momentum” that differs from our current understanding of momentum, whether it be industry momentum, residual, or any other version of momentum. Explanations of the source of profitability for momentum strategies(...) Slava Ukraini! Latest from Quantocracy contributor in Ukraine: Bloomberg-Columbia Machine Learning in Finance Workshop 2022 [Only Vix]On September 23rd Columbia U will hold its annual ML in Finance workshop. Event link. Registration link. Topics include robust portfolio construction, NLP-clustering, novel computational technique for online PCA, deep learning for statistical arbitrage (equities) and futures (momentum, mr ), both(...) Own a Part of QuantConnect [Quant Connect]Today we’re launching the next step of our journey. We’re proud to be opening ownership of QuantConnect to our community. We want to align our investors and users to continue pioneering as the world’s leading cloud quantitative analytics platform. With more than 210,000 engineers, quants,(...) Brand Values and Long-Term Stock Returns [Alpha Architect]Despite the fact that a company’s internally generated intangible investments create future value, (Summary) under current U.S. generally accepted accounting principles, internally developed intangibles are not included in reported assets. While research and development (R&D) is an important(...) Bootstrap Simulation with Portfolio Optimizer: Usage for Financial Planning [Portfolio Optimizer]In statistics, a bootstrap method, also called bootstrapping, is a compute-intensive procedure that allows to estimate the distribution of a statistic through repeated resampling from a single observed sample of data1. Bootstrapping has several applications in quantitative finance, for example to(...) Self-organizing maps for an investment strategy [Quant Dare]In a previous post, we explained how self-organizing maps work, with a very simple example. In this post, we will explain how to implement self-organizing maps for an investment strategy. Last time, we gave a simple example with a map of colors to explain in detail how self-organizing maps (SOM)(...) Mirror, Mirror on the Wall, Which is the Fairest Benchmark of Them All? [Factor Research]Evaluating manager performance is difficult as it requires an appropriate benchmark The manager’s benchmark selection is often not objective given conflicts of interests Factor exposure analysis can be used to systematically identify the best benchmark INTRODUCTION Although information asymmetries(...) Automated Trading Edge Analysis [Quantpedia]Have you ever wondered if your trading asset trends or mean-reverts? Everyone involved in trading or investments daily solves the task of – What trading strategy should I apply to my assets to generate profits? As always, we at Quantpedia will try to help you a bit with this never-ending task with(...) How You Sort Matters in Sorting Factor Portfolios [Alpha Architect]In “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I established criteria that must be met before considering investing in a factor-based strategy. We established the criteria to minimize the risks that any findings were the result of data-mining exercises. Data mining occurs(...) Research Review | 2 Sep 2022 | Trading Costs and Market Frictions [Capital Spectator]The Avoidable Costs of Index Rebalancing Robert D. Arnott (Research Affiliates), et al. May 2022 Traditional capitalization-weighted indices generally add stocks with high valuation multiples after persistent outperformance and sell stocks at low valuation multiples after persistent(...) Bold Asset Allocation [Allocate Smartly]This is a test of Dr. Wouter Keller’s tactical strategy “Bold Asset Allocation” (BAA) from his paper Relative and Absolute Momentum in Times of Rising/Low Yields. Backtested results from 1970 follow. Results are net of transaction costs – see backtest assumptions. Learn about what we do and(...) What’s wrong with Inverse ETFs? [Factor Research]Inverse ETFs come with significant risk disclosure Analyzing the performance of these products justifies the warnings There is a significant difference between performance of inverse ETFs & the inverse underlying indices INTRODUCTION In May 2022, Allianz, the large German insurance company,(...) Don't append rows to a pandas DataFrame [Wrighters.io]Most pandas users encounter a situation where choosing to append rows to a pandas DataFrame seems like a good idea. A quick search of the API (or your favorite search engine) reveals that pandas has an append method in DataFrame. You may be tempted to use it. In this article I’ll show you why you(...) Are There Intraday and Overnight Seasonality Effects in China? [Quantpedia]At the moment, there is a lot of attention surrounding overnight anomalies in various types of financial markets. While such effects have been well documented in research, especially in US equities and derivatives, there are other asset classes that are not as well addressed. We previously compiled(...) Computation of Theory-Implied Correlation Matrices [Portfolio Optimizer]In this short post, I will provide an overview of the TIC algorithm1 introduced by Marcos Lopez de Prado in his paper Estimation of Theory-Implied Correlation Matrices2, which aims to compute a forward-looking asset correlation matrix blending both empirical and theoretical inputs. I will also(...) Probabilistic programming in finance: a robust Sharpe ratio estimate [Artifact Research]In this post, we will develop a time-varying, probabilistic extension of the Sharpe ratio as a widely used performance metric for financial assets. In particular, we devise a Bayesian regime-switching model to capture different market conditions and infer the full distribution the Sharpe ratio as it(...) Forecasting Market Indices Using Stacked Autoencoders and LSTM [Jonathan Kinlay]The stem paper for this post is: Bao W, Yue J, Rao Y (2017) A deep learning framework for financial time series using stacked autoencoders and long-short term memory. PLoS ONE 12(7): e0180944. https://doi.org/10.1371/journal.pone.0180944 The chief claim by the researchers is that 90% to 95% 1-day(...) Long Volatility versus Tactical Asset Allocation [Factor Research]Long volatility strategies are attractive diversifiers, but complex and not easily accessible Tactical asset allocation for equities may be considered as an alternative There is no clear winner between these two options INTRODUCTION Risk management in portfolio construction is primarily achieved via(...) Is Relative Sentiment an Anomaly? [Alpha Architect]Relative sentiment is an indicator that measures the positions, flows, and attitudes of institutional investors compared to those of individual investors–where institutions typically consist of large asset managers, insurance companies, pension funds, and endowments. In some instances,(...) Value and momentum yes, size and CAPM no [Klement on Investing]In recent weeks, I have probably OD’ed my readers with philosophical and highbrow topics. Whether it was my Hitchhiker’s Guide to Investment Research or yesterday’s post on the Fiscal Theory of the Price Level. Since this is my last post before my summer break, I wanted to bring it down to(...) Alpha from Short-Term Signals [Alpha Architect]In “Your Complete Guide to Factor-Based Investing” Andrew Berkin and I provided six criteria that had to be met in order to determine which exhibits in the “factor zoo” are worthy of investment. For a factor to be considered, it must meet all of the following tests. To start, it must provide(...) Geometric Brownian Motion Simulation with Python [Quant Start]Generating synthetic data is an extremely useful technique in quantitative finance. It provides the ability to assess behaviour on models using data with known behaviours. This has a myriad of applications, such as testing backtesting simulators for correct functional behaiour as well as allowing(...) Protected equity fund: Split your portfolio to better fit your hedging instruments [DileQuante]Imagine you are an European insurer. One of your funds is an equity portfolio of EMU stocks. Under Solvency II framework, you might want to reduce your Solvency Capital Requirement (SCR) thanks to the use of derivatives to hedge some of your equity risk. However, due to your size, the only(...) 100-Years of the United States Dollar Factor [Quantpedia]Finding high-quality data with a long history can be challenging. We have already examined How To Extend Historical Daily Bond Data To 100 years, How To Extend Daily Commodities Data To 100 years, and How To Build a Multi-Asset Trend-Following Strategy With a 100-year Daily History. Following the(...) Outperformance Ain’t Alpha [Factor Research]Outperformance and alpha are not the same One is the difference from a benchmark, the other is the unexplained return A contribution analysis helps understanding the return drivers INTRODUCTION Almost 90% of US drivers rate themselves safer and more skillful than average. Obviously, such perceptions(...) Correlation and Correlation Structure (6) – Distance Correlation [Eran Raviv]While linear correlation (aka Pearson correlation) is by far the most common type of dependence measure there are few arguably better ways to characterize\estimate the degree of dependence between variables. This is a fascinating topic I keep coming back to. There is so much for a typical geek to(...) Three Strategies for Trading the Donchian Channel in Python [Raposa Trade]In the 1970's, Richard Donchian began the trend following trend by introducing a simple breakout trading system that would make him millions over the following decades. This system was predicated on an indicator that came to bear his name the Donchian Channel. We're going to show you how(...) Mining Credit Card Data for Stock Returns [Alpha Architect]In this article, the authors explore an alternative measure of consumer demand from a unique dataset of individual credit and debit card daily transactions ( available one week after the transaction was made on average) from January 2013 to December 2019. They ask the following: Can more timely(...) Log-normal Stochastic Volatility Model [Artur Sepp]I am introducing my most recent research on log-normal stochastic volatility model with applications to assets with positive implied volatility skews, such as VIX index, short index ETFs, cryptocurrencies, and some commodities. Together with Parviz Rakhmonov, we have extended my early work on the(...) Treasury Bonds: Buy and Hold or Trend Follow? [Alpha Architect]We were recently asked what we thought about bonds as an investment. A lot of this was inspired by my comments on bonds via a discussion on how I personally invest. I’ll repost what I said on bonds below: What are your thoughts on bonds and commodities? In general, I’m not a fan of corporate(...) What Drives Momentum and Reversal? [Alpha Architect]What are the research questions? Theories abound in the financial literature explaining the drivers of momentum and reversal in one way or another. Not surprisingly, most portray the role of public and private information as key to the underlying relationships and weigh the type of information(...) Revisiting the Performance of TAA ETFs [Factor Research]There has been a boom in launching tactical asset allocation ETFs However, the recent track record of these has been poor Declining stock and bond markets have created a challenging environment for these INTRODUCTION Most investment strategies become popular through short rather than long periods,(...) Research Review | 5 August 2022 | Multi-Factor Strategies [Capital Spectator]Combining Factors Christoph Reschenhofer (Vienna University of Economics and Business) July 2022 While the academic literature primarily investigates factor exposures based on covariances (i.e. beta exposure), most practitioners apply characteristics-based scorings to obtain factor portfolios. It(...) Crashes in safe asset markets [SR SV]A new theoretical paper illustrates the logic behind runs and crashes in modern safe asset markets. Safe assets are characterized by stable value and high liquidity. In times of distress “flight for safety” increases demand for these assets, while “dash for cash” increases supply. However,(...) Avoiding Momentum Crashes [Alpha Architect]In our book “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I presented the evidence demonstrating that momentum, both cross-sectional (CSMOM) and time-series (TSMOM), has provided a premium that has been found to be persistent across time and economic regimes, pervasive(...) Avoiding Volatile Trades [Alvarez Quant Trading]In my last blog post, Using Historical Volatility for Parameter Adjustment, I tested using historical volatility to determine trade rules. While reading the July 2022 Technical Analysis of Stocks & Commodities, I came across an article, “Is It Too Volatile To Trade?” by Perry Kaufman. I(...) Trend Following Says Commodities...But Nothing Else! [Alpha Architect]Just recently we posted the trend-following weights for our Robust Asset Allocation model. Something interesting happened — the model suggested zero exposure to every asset, except commodities(1) source: https://alphaarchitect.com/indexes/trend/#trendasset My knee-jerk reaction was, “Wow, never(...) How heavy tails destabilize Markowitz portfolio selection [Artifact Research]This is the forth and final post of a short series of posts on extreme events in financial time series. In the first post, we have introduced power-law theory to describe and extrapolate the chance of extreme price movements of the S&P500 index. In the second post, we took a closer look at how(...) The Effective Number of Bets: Measuring Portfolio Diversification [Portfolio Optimizer]Many different measures of portfolio diversification have been developed in the financial literature, from asset weights-based diversification measures like the Herfindahl Index1 to risk-based diversification measures like the Diversification Ratio of Choueifaty and Coignard2 to other more complex(...) Slava Ukraini! Latest from Quantocracy contributor in Ukraine: Modeling Dynamics of Entire Implied Volatility Surface [Only VIX]There is a very cool webinar coming up next week that I suggest everyone to register and attend link Daniel Bloch, also often listed as Daniel Alexandre Bloch has contributed a lot of research on using ML for options pricing. Also Mr Block published a very thorough free textbook options pricing that(...) Why GARCH models fail out-of-sample [Artifact Research]This is the third post of a short series of posts on extreme events in financial time series. In the first post, we have introduced power-law theory to describe and extrapolate the chance of extreme price movements of the S&P500 index. In the second post, we took a closer look at how statistical(...) Do Stocks Efficiently Predict Recessions? [Alpha Architect]What are the Research Questions? There is abundant literature on the relationship between the business cycle and future stock returns. The traditional view is that stocks are rationally priced to immediately reflect investors’ expectations about future economic activity and that expected excess(...)