Low-volatility investing is a strategy that focuses on stocks with historically lower price fluctuations, aiming to achieve strong risk-adjusted returns. Despite conventional finance theory suggesting that higher risk should lead to higher returns, research has shown that low-volatility stocks often outperform their high-volatility counterparts on a risk-adjusted basis. By reducing …

The weekend price gap is a well-known phenomenon in financial markets, particularly in assets that trade continuously during the week but pause over the weekend, such as stocks, futures, and options. When markets reopen after the weekend, prices sometimes experience a gap up or down due to news, geopolitical events, …

As cryptocurrencies become mainstream and gain acceptance, there is still no coherent investment framework for valuing them. Reference explores the differences between equity and crypto investors and proposes an investment framework for cryptocurrencies based on the prospect theory. The differences between equity and crypto investors are: Stock market investors …

Technical analysis (TA) is a trading approach that evaluates past price movements and volume data to forecast future market trends. It relies on price patterns, indicators, and statistical measures rather than fundamental factors. Investors use tools like moving averages, RSI, and Bollinger Bands to identify trends, support and resistance levels, …

Calendar anomalies in the stock market refer to patterns where stock returns deviate from expected behavior based on the time of year, month, or even day. Well-documented anomalies include the “Sell in May and Go Away” strategy, which suggests that stocks underperform during the summer months, and the “Turn-of-the-Month Effect,” …

In a paper published in 2005, Wilcox et al. showed that trend following worked on single-name stocks. Twenty years later, they retested the methodology using new, survivorship bias-free data . Basically, the trading system works as follows: Entry: If, at the close of day t, a stock meets the …

Trading systems often experience performance deterioration after going live, largely due to overfitting. Reference formally studied this issue, using analytical approximations for the in-sample and out-of-sample Sharpe ratios of portfolios. The authors pointed out, This paper derives analytical approximations for the in-sample and out-of-sample Sharpe ratios of portfolios constructed …

Momentum in the options market is an emerging and active area of research. For example, Reference demonstrated that delta-hedged straddle positions exhibit momentum, where firms with strong option performance over the past 6 to 36 months are likely to experience high option returns in the subsequent month. Reference  …

Leveraged Exchange-Traded Funds (LETFs) are financial instruments designed to amplify the daily returns of an underlying index or asset, often using derivatives and debt. Typically, LETFs aim to achieve a multiple (e.g., 2x or 3x) of the daily performance of the tracked benchmark, both on the upside and downside. LETFs …

More than 40 years ago, Merton et al. published two papers examining the performance of passive options strategies. They concluded that these strategies outperformed the traditional buy-and-hold approach. At the time of their studies, options data was not widely available, so they used historical volatility to calculate options prices. …