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Extracting roll returns from futures

Futures returns consist of two components: the returns of the spot price and the "roll returns". This is kind of obvious if you think about it: suppose the spot price remains constant in time (and...

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An options workshop and other miscellany

I confess I have always found it hard to trade options. This is despite having read some of the "bibles" of options trading, including Lawrence McMillan's Options as a Strategic Investment and Euan...

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Order flow as a predictor of return

Order flow is signed transaction volume: if an order is executed at the ask price, the incremental order flow is +(order size); if executed at the bid price, it is -(order size). In certain markets...

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A leveraged ETFs strategy

In a post some years ago, I argued that leveraged ETF (especially the triple leveraged ones) are unsuitable for long-term holdings. Today, I want to present research that suggests leveraged ETF can be...

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The Importance of 2 (as Sharpe Ratio)

A reader ezbentley recently pointed out a little-noticed fact in the derivation of Kelly's formula: if we apply the optimal Kelly leverage, then the standard deviation of the annualized compounded...

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The Pseudo-science of Hypothesis Testing

Backtesting trading strategies necessarily involves a very limited amount of historical data. For example, I seldom test strategies with data older than 2007. Gathering longer history may not improve...

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A stock factor based on option volatility smirk

A reader pointed out an interesting paper that suggests using option volatility smirk as a factor to rank stocks. Volatility smirk is the difference between the implied volatilities of the OTM put...

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A workshop, a webinar, and a question

There is a workshop on the 25th of February titled "Market turbulence; monetization; and universality" by Mike Lipkin at Columbia University that promises to be interesting to those traders who have a...

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What Can Quant Traders Learn from Taleb's "Antifragile"?

It can seem a bit ironic that we should be discussing Nassim Taleb's best-seller "Antifragile" here, since most algorithmic trading strategies involve predictions and won't be met with approval from...

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An Integrated Development Environment for High Frequency Strategies

I have come across many software platforms that allow traders to first specify and backtest a strategy and then, with the push of a button, turn the backtest strategy into a live trading program that...

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Nonlinear Trading Strategies

I have long been partial to linear strategies due to their simplicity and relative immunity to overfitting. They can be used quite easily to profit from mean-reversion. However, there is a serious...

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My new book on Algorithmic Trading is out

A reader (Hat tip: Ken) told me that my new book Algorithmic Trading: Winning Strategies and Their Rationale is now available for purchase at Amazon.com. The difference with my previous book? A lot...

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Momentum Crash and Recovery

In my book I devoted considerable attention to the phenomenon of "Momentum Crashes" that professor Kent Daniel discovered. This refers to the fact that momentum strategies generally work very poorly in...

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Guest Post: A qualitative review of VIX F&O pricing and hedging models

By Azouz GmachVIX Futures & Options are one of the most actively traded index derivatives series on the Chicago Board Options Exchange (CBOE). These derivatives are written on S&P 500...

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How Useful is Order Flow and VPIN?

Can short-term price movement be predicted? (I am speaking of  seconds or minutes here.) This is a question not only relevant to high frequency traders, but to every long-term investor as well. Even if...

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Cointegration Trading with Log Prices vs. Prices

In my recent book, I highlighted a difference between cointegration (pair) trading of price spreads and log price spreads. Suppose the price spread hA*yA-hB*yB of two stocks A and B is stationary. We...

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Variance Risk Premium for Return Forecasting

Folklore has it that VIX is a reasonable leading indicator of risk. Presumably that means if VIX is high, then there is a good chance that the future return of the SP500 will be negative. While I have...

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Fundamental factors revisited, with a technology update

Contrary to my tradition of alerting readers to new and fancypants factors for predicting stock returns (while not necessarily endorsing any of them),  I report that Lyle and Wang have recently...

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Update on the fundamentals factors: their effect on small cap stocks

In my last post, I reported that the fundamental factors used by Lyle and Wang seem to generate no returns on SP500 large cap stocks. These fundamental factors are the growth factor return-on-equity...

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Short Interest as a Factor

Readers of zerohedge.com will no doubt be impressed by this chart and the accompanying article:Cumulative Returns of Most Shorted Stocks in 2013Indeed, short interest (expressed as the number of shares...

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