Thursday, February 11, 2016

Proof that no trading system always wins

mathematics - Proof that no trading system always wins - Quantitative Finance Stack Exchange: "This doesn't really suffice as an existence proof, but you can start with a series of mathematical results collectively known as no free lunch theorems. The linked paper proves the average performance of any optimization algorithm over arbitrary problem domains is independent of the algorithm. That is, no single algorithm can ever be better than others on any problem, meaning optimal performance over any single problem domain requires some level of domain knowledge, and knowledge has to be learned. Learning requires inference."

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Monday, February 08, 2016

yield curve - Is trading mean reversion of small principal components of prices profitable? - Quantitative Finance Stack Exchange

yield curve - Is trading mean reversion of small principal components of prices profitable? - Quantitative Finance Stack Exchange: "PCA is most commonly used for structuring so-called "butterfly trades." In this, you're neutralizing the first two PCs (level and slope) and trade on the third PC (curvature). For example, after running a PCA on 2y, 5y, and 10y yields, you may conclude that 5y yields are too high relative to 2- and 10-year yields (i.e., 5-year bonds are "cheap"). In this case, you'd buy 5-year bonds, while simultaneously shorting 2- and 10-year bonds. PCA comes into play, because for each unit of 5-year bonds, you have to choose appropriate units of 2- and 10-year bonds ("risk weights") so that the the first two principal components are neutralized, allowing you to trade any abnormalities in the third principle component"

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Monday, January 25, 2016

New ways of diversifying

The FT uses a Healthy eating analogy to discuss the new ways of trying to diversify risk. This involves the use of factor rather than diversification through assets and countries:
  1. Volatility (traditional volatility)
  2. Momentum (buying of winners)
  3. Quality (strong balance sheet firms)
  4. Value (cheap investments)
  5. Yield (high income)
  6. Growth (high earnings growth)
  7. Size (Small companies do better)
There are also bond factors
  1. Duration (sensitivity to  rate changes)
  2. Curve (maturity and return)
  3. Volatility (sensitivity to foreign exchange movements)
  4. Spread (credit risk)
These  move beyond value and growth or carry and momentum. Though all asset classes may fall in crisis, the value drivers tend to find more diverse performance. 

Sunday, January 24, 2016

Bear territory: Avoid urge to flee —

Bear territory: Avoid urge to flee.  Some interesting research from the, but not, as they say because it shines light on technical analysis, which it does not, but because it illuminates the risk of overs-shooting:

"According to those fonts of wisdom the technical analysts, the FTSE 100 and Nikkei 225 indices both on Wednesday slipped into bear market territory, as defined by a 20 per cent fall from an earlier peak. To normal ears, this sounds like a sell signal."

This is consistent with the herding that Olivier Blanchard has been speaking about earlier in the week.

Passive investors are good corporate stewards

Passive investors are good corporate stewards —  Passive investment not so passive.

 "Worries that passive management is inhibiting price discovery will continue. But this research is a very promising sign that when investors entrust their money to passive fund managers, their interests are indeed being represented aggressively with company managements."

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Friday, January 22, 2016

Poor white deaths

Following on from the Case and Deaton identification of increased death rates for middle age non-Hispanic whites, Andrew Gelman and Jonathan Auerbach identify the increase in the average age of the cohort as being the main cause of this trend (rather than the more satisfying work-life experience of the group as was commonly inferred from the data).  Even more intriguing, adjusting for gender and state, it appears that souther women are the dying at a more rapid pace that in the past.  The clear pictures of this change are here. :

Tuesday, January 19, 2016

Blanchard: oil and China

Oliver Blanchard takes a look at the effect of China and oil prices on the stock market:  While the fall in oil prices has traditionally been a positive for the oil consumers like the US, the US has a much larger role in the new environment.  The effect of bad loans to fracking companies combines with what Paul Krugman has suggested are the non-linear effects of oil price declines.  

"Take the oil price explanation. It is even more puzzling. Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States. Consumers, with more money to spend, would increase consumption, and increase output. Energy using firms, with lower cost of production, would increase investment. We learned in the last year that, in the short run, the adverse effect on investment on energy producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion. Yet the headlines are now about low oil prices leading to low stock prices. I can think of two potential explanations, neither of them convincing."
The momentum behind selling from China have been is also an issue for Blanchard.

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Thursday, January 14, 2016

Japan: Deflated generation -

Japan: Deflated generation - "This year’s celebrants, born in 1995 and 1996, are the first to have spent their entire journey to adulthood in an economy of mostly falling consumer prices. Their lives have been so infused by the phenomenon that several say deflation, one of the main obstacles to growth through the 2000s, has evolved into a source of low-level apprehension that limits ambition."

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