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Using the Hurst Exponent and Stock Comovements for Pairs Trading

Posted on October 24, 2021 By 
Pairs trading, or statistical arbitrage, is an effective market-neutral trading strategy. Usually fundamental or quantitative analysis is used in order to determine which pairs are suitable for trading. We have previously discussed several pairs selection methods based on quantitative measures such as stock cointegration, correlation, pair distances, etc. Reference  …
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How Options Imbalances Affect Price Dynamics

Posted on October 20, 2021 By 
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. …
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Long-Run Variances of Trending and Mean-Reverting Assets

Posted on October 6, 2021 By 
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 …
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Using the Gaussian Mixture Models to Identify Market Regimes

Posted on September 28, 2021 By 
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 …
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Factor Investing Through Principal Component Analysis

Posted on September 16, 2021 By 
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, …
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Using an Autoregressive Model to Predict the Price-to-Earnings Ratio and Develop an Investment Strategy

Posted on September 10, 2021 By 
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 …
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Momentum Trading Strategies Across Capital Markets

Posted on September 1, 2021 By 
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. …
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Are Econometric Models Useful in Trading?

Posted on August 26, 2021 By 
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, …
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