This is a summary of links recently featured on Quantocracy as of Tuesday, 01/21/2025. To see our most recent links, visit the Quant Mashup. Read on readers!
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Iterative PSD Shrinkage (IPS) [CSS Analytics]In the previous post the framework for Generalized Downside Implied Correlations was introduced. You can use this correlation matrix derived from joint risk metrics to replace or augment/blend with traditional correlations for use in analysis or optimization. The challenge is that the resulting matrix may not be positive semi-definite (PSD) or well-conditioned. The solution is to find a reasonably
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Monte Carlo Simulations: Pricing Weather Derivatives and Convertible Bonds [Relative Value Arbitrage]Monte Carlo simulations are widely used in science, engineering, and finance. They are an effective method capable of addressing a wide range of problems. In finance, they are applied to derivative pricing, risk management, and strategy design. In this post, we discuss the use of Monte Carlo simulations in pricing complex derivatives. Pricing of Weather Derivatives Using Monte Carlo Simulations
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Artificial Intelligence and the Risks of Harking (Hypothesizing After-the-Fact) [Alpha Architect]Academics have long been aware of the risks of data miningtorturing the data until it confesses. The concern is that correlation of variables doesnt imply that the correlation is a result of causation. That is the reason that the prevailing academic standard for researchers is that they should first develop their hypothesis and predictions before testing them against the data. To minimize
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Research Review | 17 January 2025 | Risk Premia [Capital Spectator]An Investigation into the Causes of Stock Market Return Deviations from Real Earnings Yields Austin Murphy (Oakland University), et al. December 2024 This research demonstrates that the simple difference between the current earnings yield on the S&P500 and the long-term real TIPS yield has significant forecasting power for excess returns on that stock market index over both short-term and
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Intraday Momentum for ES and NQ [Quantitativo]"If I have seen further, it is by standing on the shoulders of giants. Sir Isaac Newton. First of all, Happy New Year! When I started Quantitativo a few months ago, I could never expect to gather such an amazing group of like-minded people in such a short time. Your enthusiasm, curiosity, and engagement have made this journey incredibly rewarding and inspiring. Reflecting on the many, many
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Factor Investing Clearing the Air Datamining and the Antidotes [5th Horizon Research]Factor Investing Origins and Implications The roots of factor investing can be traced to work published in the early 1990s by two academics: Ken French and Eugene Fama. In two of their publications[1], they identified a set of risk factors priced to consistently and robustly provide a return premium. Three of these, Beta (market), Size (market capitalization), and Value (book-to-market) survived
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Out-of-Sample Test of Formula Investing Strategies [Quantpedia]Can we simplify the complexities of the stock market and distill them into a simple set of quantifiable metrics? A lot of academic papers suggest this, and they offer formulas that should make the life of a stock picker easier. Some of the most compelling methodologies within this realm are the F-Score, Magic Formula, Acquirers Multiple, and the Conservative Formula. These quantitative