The Multiple Factor Model can be used to decompose returns and calculate risk. Following are some examples of the Multiple Factor Models: The expected returns factor model: Commonality In The Determinants Of Expected Stock Returns by R. Haugen, N. Baker (1996) The expected returns factor model: CSFB Quantitative Research, Alpha Factor ... [Read more...]

THIS IS NOT INVESTMENT ADVICE. The information is provided for informational purposes only. In the Time Series Matching post, I used one to one mapping to the compute distance between the query(current pattern) and reference(historical time series). Following chart visualizes this concept. The distance is the sum of ... [Read more...]

This is a quick post to address comments raised in the Time Series Matching post. I will show a very simple example of backtesting a Time Series Matching strategy using a distance weighted prediction. I have to warn you, the strategy’s performance is worse then the Buy and Hold. ... [Read more...]

THIS IS NOT INVESTMENT ADVICE. The information is provided for informational purposes only. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. Do you want to know what S&P 500 will do in the next week, month, quarter? ... [Read more...]

Quantum Financier wrote an interesting article Regime Switching System Using Volatility Forecast. The article presents an elegant algorithm to switch between mean-reversion and trend-following strategies based on the market volatility. Two model are examined: one using the historical volatility and another using the Garch(1,1) Volatility Forecast. The mean-reversion strategy is ... [Read more...]

Frank Hassler at Engineering Returns blog wrote an excellent article Rotational Trading: how to reduce trades and improve returns. The article presents four methods to reduce trades: Trade less frequently. I.e. weekly instead of daily rebalancing. Different criteria for enter / exit a trade. Smooth the rank over the last ... [Read more...]

I wrote about Rebalancing in the Asset Allocation Process Summary post. Deciding how and when to rebalance (update the portfolio to the target mix) is one of the critical steps in the Asset Allocation Process. I want to study the portfolio performance and turnover for the following Rebalancing methods: Periodic ... [Read more...]

I want to show how to combine various risk measures I discussed while writing the series of posts about Asset Allocation with backtesting library in the Systematic Investor Toolbox. I will use Minimum Variance portfolio as an example for this post. I recommend reading a good discussion about Minimum Variance ... [Read more...]

The end of the month effect was examined by MarketSci in the The Last Day of the Month Blahs post. The idea is simple: buy on the last day of the month and sell a few days later. This idea was put into a strategy by Quanting Dutchman in the ... [Read more...]

I want to discuss the implementation of Rotational Trading Strategies using the backtesting library in the Systematic Investor Toolbox.The Rotational Trading strategy switches investment allocations throughout the time, betting on few top ranked assets. For example, the ranking can be based on relative strength or momentum. A few examples ... [Read more...]

I want to illustrate Backtesting with Short positions using an interesting strategy introduced by Woodshedder in the Simple, Long-Term Indicator Near to Giving Short Signal post. This strategy was also analyzed in details by MarketSci in Woodshedder’s Long-Term Indicator post. The strategy uses the 5 day rate of change (ROC5) ... [Read more...]

When designing a trading strategy, I want to make sure that small changes in the strategy parameters will not transform the profitable strategy into the loosing one. I will study the strategy robustness and profitability under different parameter scenarios using a sample strategy presented by David Varadi in the Improving ... [Read more...]

While investigating Intraday patterns in FX returns and order flow paper I have faced the problem with timezone. I had 3 data sources with different timezones (GMT, CET, CEST). Most confusing thing was, that I didn’t know, how to deal with summer time. But why did I have the data ... [Read more...]

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Long time ago I stumbled across interesting volatility measurement at quantifiableedges.blogspot.com. The idea is following: take 3-day historical volatility of S&P 500 index and divide that by 10-day historical volatility. Then mark all points which are less that 0.25 and measure the volatility of 3 following days. On average, the ... [Read more...]

Recently, Trading the odds posted one of many flavors of mean reverting strategies and I decided to get my hands dirty by writing R code and testing it. You can find full description of the strategy by following latter link above. Long story short – if SPY shows lower open, high ... [Read more...]

How many times have you been disappointed by nice trading system, because neither trading cost or slippage or bid/ask spread were included into back-test results? Did you find difficult to back-test a portfolio in R or many portfolios with different stocks? Blotter package is supposed to solve these problems. ... [Read more...]