Category: TRADING

Leveraged ETFs: Do They Really Decay?

Leveraged ETFs (LETFs) are financial instruments designed to amplify the daily returns of an underlying index, typically by a factor of two or three. They have received criticism for performance drag or value erosion over time. Despite these concerns, they continue to attract attention and capital from investors. A recent …

Enhancing Trading Strategies Using Model Uncertainty

Most trading systems focus on algorithms for generating entry and exit signals. When the performance deteriorates, developers often try to introduce additional filters and/or modify system parameters. Reference applied a novel technique, called Dynamic Model Averaging (DMA), to improve model performance. Basically, DMA estimates model uncertainty, and a trade …

Interest Rate Sensitivity in Low-Volatility Investing

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 …

Applying Prospect Theory to Crypto Valuation and Portfolio Diversification

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 …

Formal Study of Overfitting in Trading System Design

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 …