TRADING

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, Principal Component Analysis (PCA). Thanks…

Read More Factor Investing Through Principal Component Analysis

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 [1] showed that the Price-to-Earnings ratio is a mean-reverting process, and it can be accurately estimated by AR(1), an econometric model.…

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

Volatility (or variance) risk premium is a well-known phenomenon in financial markets. Many trading strategies have been designed to exploit it. For example, we published two trading strategies that use the VIX ETF to harvest the volatility risk premium. To be more accurate, their risk drivers are Volatility risk premium, i.e. implied/realized volatility differential, Futures…

Read More Long-Term Trading Strategies for Harvesting Volatility Risk Premium

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. However, we only focused on…

Read More Momentum Trading Strategies Across Capital Markets

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 [1] that demonstrated the usefulness of advanced volatility estimators in trading by reducing trading strategies’ turnover. On the same topic, Reference [2] attempted to directly…

Read More Are Econometric Models Useful in Trading?

Bitcoin was born as a niche investment vehicle, but over time it has become a mainstream asset. Many research papers have been devoted to developing trading strategies for Bitcoin, but we just recently came across one [1] that examined the PnL/risk driver in terms of autocorrelations and developed trading systems accordingly. Specifically, the paper investigated…

Read More Trading Strategies Based on Autocorrelation Properties of Bitcoin

A financial option is a rather complex instrument. Unlike delta-one products, an option value depends not only on the underlying, but also on volatility, time to maturity, strike, interest rate, and dividends. Options have been used as hedging instruments, but they’re becoming a speculative vehicle these days thanks to a growing number of retail traders…

Read More Stop Losses in Options Trading

Pairs trading is a classic “market-neutral” trading strategy. Previously, we highlighted an article that claims that cointegration is a superior method for selecting pairs [1]. On the same topic, Reference [2] examined more pair selection methods. Specifically, it investigated the following approaches, Distance: Pairs are identified by using distance metrics. This is perhaps the simplest…

Read More Is Cointegration the Best Method for Pairs Trading?

The arbitrage principle is one of the cornerstones of modern finance, and it’s being used widely, from derivative pricing to hedging, trading, and risk management. Theoretically, there is only one arbitrage principle. Practically, however, there are other types of arbitrage, some of which are relaxed forms of the strictest one. Reference [1] examined two seemingly…

Read More Do Arbitrage Opportunities Still Exist?

Volatility estimators are a useful tool in volatility trading and risk management. We have discussed several types of volatility estimators, ranging from the simple Close-to-Close Historical Volatility to more complex ones like the Garman-Klass-Yang-Zhang volatility. As discussed in Reference [1], volatility estimators can also be used directly in delta-one trading by Commodity Trading Advisors. The…

Read More An Application of Volatility Estimators