How Options Imbalances Affect Price Dynamics

As discussed several times, markets can be loosely divided into two regimes: trending, and mean-reverting. The majority of trading literature has been devoted to exploiting these market characteristics. Less attention, however, is paid to the explanation of their existence. They are often attributed to investors’ over-, underreaction and/or market inefficiencies. …

Long-Run Variances of Trending and Mean-Reverting Assets

Trading strategies are often loosely divided into two categories: trend-following and mean-reverting. They’re designed to exploit the mean-reverting or trending properties of asset prices. These properties are often investigated through time series techniques or Hurst exponent. Reference provided, however, a different perspective and approach for studying the mean-reverting and …

Using the Gaussian Mixture Models to Identify Market Regimes

Characterizing the market is an important step in trading system development. Currently, there exist a couple of approaches for identifying market regimes such as using trend and/or volatility filters, machine learning techniques, etc. Reference proposed an approach that uses the Gaussian Mixture Models to identify market regimes by dividing …

Factor Investing Through Principal Component Analysis

Factor investing is a well-known investment strategy used mostly by quant funds. Even though the factors are well published, it’s important to distinguish 2 types of factors: Explicit factors: these are for example momentum, value, size, quality, etc. Implicit factors: these are statistical features determined by using e.g. maximum likelihood, …

Using an Autoregressive Model to Predict the Price-to-Earnings Ratio and Develop an Investment Strategy

In a previous post, we highlighted an article that showed how useful accounting numbers are. In this post, we will present a concrete example of an application of accounting numbers in portfolio management. Reference showed that the Price-to-Earnings ratio is a mean-reverting process, and it can be accurately estimated …

Momentum Trading Strategies Across Capital Markets

Momentum trading is a popular investment strategy. Loosely speaking, it consists of periodically buying groups of outperforming stocks and selling non-winning stock portfolios. We have presented studies that demonstrated the trending property of equity indices in the long term. This led to the possibility of developing profitable momentum investment strategies. …

Are Econometric Models Useful in Trading?

We have previously presented time series analysis for identifying autocorrelation properties of stock indices and econometric techniques such as ARIMA and GARCH for estimating volatilities. We also highlighted an article that demonstrated the usefulness of advanced volatility estimators in trading by reducing trading strategies’ turnover. On the same topic, …