Trading is a difficult endeavor, and the main reason most traders fail is that they don’t have an edge. The expectation value of most trading strategies is zero before commissions and slippage. Taking commissions and slippage into account, trading is a negative-sum game. Even with a positive expectancy trading system, …

Momentum trading is often divided into 2 categories: time-series momentum and cross-sectional momentum. Time-series based trading strategies generate trading signals based on the asset’s past returns. A typical time-series trading strategy usually involves buying assets with positive trend signals and selling those with negative trend signals. In contrast, cross-sectional trading …

Day trading is a popular discussion topic in the practitioners’ literature, the blogosphere, and social media. It receives,  however, less attention in the academic community. We have previously discussed a paper on the intraday momentum in the stock indices. Reference extended the research to the oil market. It used …

Pairs trading is a quantitative trading strategy that is often discussed in the academic as well as practitioners’ literature. We have written about this trading strategy extensively from different perspectives. In this post, we’re going to look at the risk/PnL drivers of the pairs trading strategy. Reference pointed out …

Portfolio hedging is a risk-management practice that uses a number of strategies to mitigate the risks of any given portfolio. Tail risk hedging in particular is one of the techniques used in equity portfolio management. It basically involves buying put options in a certain amount to partially or fully protect …

A company’s book value is basically the net worth of its assets as found on the balance sheet, and it’s usually about equal to the amount that all shareholders will receive if the company liquidates and pays off all of its liabilities. Book value has been one of the most …

The liquidity of a stock is of concern to traders who want to execute a large order at reasonable prices without making a big impact on the market. A stock liquidity level is, however, also a factor influencing the stock expected return. Along this line, Reference examined how a …

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  …

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. …

In a previous post, we presented an article on using an econometric model for predicting the P/E ratio. In this post, we will discuss a different approach for predicting a firm’s financials. Reference utilized the Gradient boosting method for predicting a firm’s profitability. Gradient boosting is a method that …