Itzhak Ben-David, Jiacui Li, Andrea Rossi, and Yang Song contribute to the literature on the behavior of individual investors with their July 2021 study “What Do Mutual Fund Investors Really Care About?”, published in the July 2021 issue of The Review of Financial Studies. They began by noting

The internet is teeming with resources for potential alpha. How do you separate the wheat from the chaff? In this series of blog posts, I will explain my process for identifying sources worth diving deeper into and extracting some kind of benefit to a portfolio or strategy. This will be a

Equity investors are drawn to the asset class with the expectation of an attractive and consistent risk premium. But with this risk premium comes the real risk of downside volatility. Traditionally, investors have paired stocks with defensive assets like bonds to provide anti-correlative benefits,

Kind of sad, but the same intro which served last year, befits this year also. Littered with Corona, this year was not easy. But looking around me, I feel grateful. The following quote by Socrates comes to mind: “If all our misfortunes were laid in one common heap whence everyone must take an

2021 was a year of moderate factor performance Value, Quality, and Low Volatility factors generated positive returns Momentum and Size were negative INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years. Specifically, we only present factors

In a previous post, we discussed how the dynamics of assets are priced in the options prices. We recently came across a newly published article [1] that explored the same topic but from a different perspective that does not involve options. The conclusion of the new article [1] is consistent with

As usual, at this time of the year, let us do a short recapitulation of posts on our blog in the previous 12 months. We have published nearly 70 short analyses of academic papers and our own research articles on this blog in 2021. We want to use this opportunity to summarize 10 of them, which were

This is a test of the “Global Growth Cycle” strategy from Grzegorz Link that uses OECD Composite Leading Indicator (CLI) data to time the market. We’re going to present these results in an odd way. First, we’re going to replicate Grzegorz’s test, which (as he discusses) includes a degree

Momentum, the tendency of past winner stocks to outperform past loser stocks over the next several months, is one of the most well-documented and well-researched asset pricing anomalies. In our book, “Your Complete Guide to Factor-Based Investing,” Andrew Berkin and I present the evidence of a

In the past year, that is by far the most common question I get. Now that Quantopian went the way of the Dodo, is Zipline dead? Should we switch to a different backtesting engine? The short answer is that the rumors of Zipline’s demise are exaggerated, but let’s take it from the start. My 2019

Grid trading is an automated currency trading strategy where an investor creates a so-called “price grid”. The basic idea of the strategy is to repeatedly buy at the pre-specified price and then wait for the price to rise above that level and then sell the position (and vice versa with shorting

Market regimes are clusters of persistent market conditions. They affect the relevance of investment factors and the success of trading strategies. The practical challenge is to detect market regime changes quickly and to backtest methods that may do the job. Machine learning offers a range of

A member of The Crew recently asked me about the January Effect and if had I done any research on it. I had not. I have tested the December effect, which is buying the worst stocks of the year on December 1st, Should You Buy the Best or Worst YTD Stocks. From Investopedia, ‘The January Effect is a

We are calling it quits for the holidays. Most of us have kids and Santa is coming to town! We’ll talk about research and educate investors next week. Here are the Top 5 content pieces this year (Based on traffic): Even God would get fired as an Active Investor Does Gamma Hedging Actually Affect

Trading Down: The Effects of Active Trading on One-Month ETF Returns Ian Gray (Loyola Marymount University) December 15, 2021 Ark Investment Management (ARK), led by CIO Cathie Wood, has risen to prominence over the past few years because of its remarkable performance. Because of requirements for

No matter how you slice it, Value stocks are historically cheap compared to the past. There have been numerous articles on this topic, such as Ryan’s post here, Larry Swedroe’s post here, and more recently, Cliff Asness’ post here. Cliff’s post is one picture, shown below. 1 Source:

I’ve posted and updated the “Twas 3 Nights Before Christmas” study on the blog here several times since 2008. The study will kick in at the close today (12/21). This year I will again show the Nasdaq version of the study. While all the major indices have performed well during this period, the

This post covers an issue rarely discussed in backtesting: the day’s last real-time price shown at 4pm ET often differs slightly from the day’s official closing price determined shortly after 4pm. This is not an Allocate Smartly issue; it’s an oddity of the exchanges. Every so often this

Value stocks sharply underperformed growth stocks from 2017 to 2020, exacerbating a longer period of lackluster performance dating back to the Global Financial Crisis. The Death of Systemic Value Investing is not new news for frequent readers of the blog nor are the possible pathways to Resurrecting

Imagine you’re an asset-pricing researcher. You’ve just thought up a new variable, X, that might predict the cross-section of returns. And you’ve regressed returns on X in a market environment e of your choosing (i.e., using data on some specific time period, country, asset class, set of test

We’ve spent the past few posts building up the Starter System laid out in Rob Carver’s book, Leveraged Trading. We’ve gone from a simple moving average cross-over model, to a volatility targeting system with multiple instruments and time frames that dynamically sizes and re-positions your

John Ehlers strikes again. The TASC January 2022 issue features another indicator supposedly improved with Hann windowing – the RSIH, a RSI with Hann flavour. Can it beat the standard RSI? The RSI is basically the normalized difference of price up/down movements. And its here presented Hann

We can use self-organizing maps for clustering data, trained in an unsupervised way. Let’s see how. This week we are going back to basics, as we will see one of the first successfully deployed machine learning algorithms: self-organizing maps (SOM, sometimes also called Kohonen maps). This is an

When I wrote my first book a decade ago, I didn’t expect it to get much attention, or sales. I was in the wrong country, of the wrong nationality, I had shunned social media and was nearly invisible on the internet. On top of these obstacles, I tried out a whole new style of writing trading books.

A long time ago, before elevators were a thing, a simple mechanism was used to get the miners in and out of the mines. This mechanism is called a “Man Engine” (or “Fahrkünst” in German language) and works on a simple principle of two reciprocating ladders and stationary platforms. The two

Whatever kind of strategy you're employing as an investor, an invaluable tool for determining it's usefulness is testing. Not simply backtesting on historical data or stress testing on synthetic data – that's the easy part. The fun and playful part. A much more important test comes

In quantitative finance, we very often deal with a sample mean and sample standard deviation being derived given a vector or a time-series or any other (1-dimensional) dataset. For many of us these calculations are so obvious that only a few understand the principles standing behind the scene.

A wide range of strategies are marketed as beneficiaries of rising interest rates Portfolios are comprised of equities, bonds, options, long as well as short positions However, only financial services companies and short bonds offer a positive correlation to interest rates INTRODUCTION In this year,

A short code snippet to apply PCA on stocks returns. No secret sauce is used here to clean the empirical covariance matrix. This blog post will mostly serve as a basis for comparing several flavours of PCA and their impact on ex-ante volatility estimation. We may look in future blog posts into

The risk reversal premium manifests as an overpricing of out-of-the-money put options relative to out-of-the-money call options with equal expiration dates. The premium apparently arises from equity investors’ demand for downside protection, while most market participants are prohibited from

It is indisputable that the data are changing financial markets – computing power has increased, allowing to rise the trends of ML/AI and big data (number of possible predictors or granularity) or HFT strategies. Indeed, not all the datasets are worth the time of academics, investors or traders,

Pandas is a great tool for time series analysis of financial market data. Because pandas DataFrames and Series work well with a date/time based index, they can be used effectively to analyze historical data. By financial market data, I mean data like historical price information on a publicly traded

“Value investing is at its core the marriage of a contrarian streak and a calculator.” S. Klarman “The first principle is that you must not fool yourself, and you are the easier person to fool.” R. Feynman In this brief note, our goal is to show readers, as objectively as possible, the

Average stock market returns are similar regardless if volatility was high or low However, given skewed returns, it was not attractive investing when volatility was high Unfortunately implementing a strategy to avoid high volatility periods is emotionally challenging INTRODUCTION Active fund

Most readers are familiar with p-hacking and the so-called replication crisis in financial research (see here, here, and here for differing views). Some claim that these research challenges are driven by a desire to find ‘positive’ results in the data because these results get published, whereas

Great book, I absolutely recommend. Precise and concise (less than 200 pages). This book will especially be useful to grads or analysts in the early stages of their career. A junior analyst/quant/data scientist who masters the content of this book will definitely be useful in a pod of fundamental

An asset-pricing model is a claim about which optimization problem people are solving when they choose their investment portfolios. One way to make such a claim testable is to derive a condition that should hold if people were actually solving this optimization problem. And the standard approach to

The current workhorse asset pricing model is the Fama-French five-factor model (2015), which added the profitability and investment factors to their original (1992) three factors of market beta, size, and value—increasing the model’s explanatory power. Nusret Cakici and Adam Zaremba contribute

I realise that I've never actually sat down and described my fully automated futures trading system in all it's detail; despite having runit for around 7.5 years now. That isn't because I want to keep it a secret - far from it! I've blogged or written books about all the various

In this post we will show how the properties of a triangle can be used to intuitively obtain insights about the volatilities and correlations of currency pairs. Once the dominant branch of mathematics, geometry plays now a secondary role. However, its graphical arguments still seem to be better

Systematically trading a single instrument can be a bit dull. There are times when your chosen stock isn’t trending or doing much. So your system just sits there and waits…and waits..and waits. Obviously we don’t want to trade just to trade – that’s a good way to start losing money. But if

Traditional finance academics lean towards risk-based models to explain why various return characteristics, such as value and momentum, predict returns. But there is another school of thought often referred to as ‘behavioral finance.’ This field has some of its own ideas (see below) on why

While the holiday season has long been regarded as a time of excess, folks this year are bracing for another challenge besides annual waistline expansion: price inflation. As we gather with family and friends for the holidays in coming weeks many are predicting that this year’s turkey will be the

With a long-term time horizon, investors should consider alternatives to the market-cap weighted equity indices A valuation-based approach for creating an equities portfolio may seem more sensible Using EBITDA / EV yield seems to avoid some of the quality issues of other value metrics INTRODUCTION

Hendrik Bessembinder published a fascinating paper, which finds that nearly all publicly traded stocks in the U.S. — if held as buy and hold investments — underperform Treasury bills. This finding is incredibly surprising and interesting. Of course, when bold claims are made, they tend to

Today’s study is one of several that will be appearing in the Quantifiable Edges Subscriber Letter in a few hours. Quantifiable Edges Black Friday sale has been extended through Cyber-Monday. Act now to take advantage. After Monday – its gone. Black Friday was a tough one for the market, with

We present a theoretical and empirical methodology that reflects the Cryptocurrency version of VIX, which we name it as CVIX (Crypto VIX), and captures the future 30 days forward Crypto risk (fear). Our framework is built on idiosyncratic and systematic Crypto risk, and is not based on the option

Volatility indices, based upon the methodology of the Cboe volatility index (VIX), serve as measures of near-term market uncertainty across asset classes. They are constructed from out-of-the-money put and call premia using variance swap pricing. Volatility indices for fixed income markets are of

Table of contents: What does live algorithmic trading on the Cloud mean? What are the pros and cons of deploying your trading strategies to the Cloud? What is the Cloud Service? What is Cloud used for? What cloud providers are good? What are Amazon Web Services (AWS)? Why should I use AWS? Why

In recent years we’ve seen an increase in the accuracy of NLP models through the use of Transformers. These models rely on the attention mechanism to identify key features but, how do they work? And most importantly, can we somehow use them in finance? Transformers The transformer is a relatively