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 …

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 …

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, …

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 …

Volatility (or variance) risk premium is a well-known phenomenon in financial markets. Many trading strategies have been designed to exploit it. For example, we published two trading strategies that use the VIX ETF to harvest the volatility risk premium. To be more accurate, their risk drivers are Volatility risk premium, …

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. …

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, …

Bitcoin was born as a niche investment vehicle, but over time it has become a mainstream asset. Many research papers have been devoted to developing trading strategies for Bitcoin, but we just recently came across one that examined the PnL/risk driver in terms of autocorrelations and developed trading systems …

A financial option is a rather complex instrument. Unlike delta-one products, an option value depends not only on the underlying, but also on volatility, time to maturity, strike, interest rate, and dividends. Options have been used as hedging instruments, but they’re becoming a speculative vehicle these days thanks to a …

Pairs trading is a classic “market-neutral” trading strategy. Previously, we highlighted an article that claims that cointegration is a superior method for selecting pairs . On the same topic, Reference examined more pair selection methods. Specifically, it investigated the following approaches, Distance: Pairs are identified by using distance metrics. …