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...
View ArticleAn 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...
View ArticleOrder 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...
View ArticleA 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...
View ArticleThe 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...
View ArticleThe 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...
View ArticleA 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...
View ArticleA 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...
View ArticleWhat 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...
View ArticleAn 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...
View ArticleNonlinear 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...
View ArticleMy 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...
View ArticleGuest 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...
View ArticleHow 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...
View ArticleCointegration 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...
View ArticleVariance 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...
View ArticleFundamental 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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