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 …

Parameter optimization is a technique used in trading strategy design. It is used to identify the best set of parameters for maximizing performance and to study the strategy dynamics in order to gain insights. However, while this technique is frequently applied to linear instruments, it is used less often on …

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 …

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 …