How Does Weighting Scheme Impacts Systematic Equity Portfolios?

27.April 2022

How often do you think about the weights of the assets in your portfolio? Do you weigh your assets equally, or do you prefer value-weighting? The researchers behind a recent research paper analyzed various weighting schemes and examined their effect on factor strategy return. They studied five weighting schemes that ignore prices: equal weighting, rank weighting, z-score weighting, inverse volatility weighting, and fundamental weighting, and three price-based weighting schemes: Rank x mcap (rank-times-mcap), Z-score x mcap (z-score-times-mcap), and Integrated core.

They found that schemes that are not based on price can inflate turnover and costs. However, the weighting schemes based on price are the most practical to target multiple premiums, provide robust risk control, and decrease turnover and expenses.

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The Price of Transaction Costs

22.April 2022

Capturing the systematic premia is the main aim of many quantitative traders. However, investors tend to overlook an important factor when backtesting. Trading costs are an essential part of every trade, and yet even when we consider them, we only use an approximation. The recent article from Angana Jacob (SigTech) looks into how heavily trading costs affect the overall return of various strategies and analyzes multiple ways of implementing trading costs into the trading rules themselves.

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What’s the Best Factor for High Inflation Periods? – Part II

13.April 2022

This second article offers a different look at high inflation periods, which we already analyzed in What’s the Best Factor for High Inflation Periods? – Part I. The second part looks at factor performance during two 10-year periods of high inflation. What’s our main takeaway? The best hedge for a high inflation period is the value or momentum factor. Other promising factors (energy sector, small-cap stocks, or long-run reversal) don’t perform as consistently as value and momentum.

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What’s the Best Factor for High Inflation Periods? – Part I

11.April 2022

Another period of long sustained high inflation is probably right around the corner, as the Russia-Ukraine Conflict keeps evolving, and its end is nowhere to be seen. In this article, we analyzed the Consumer Price Index from the Federal Reserve Bank of Minneapolis, which includes the rate of inflation in the USA since 1913. We found multiple years during which the inflation was abnormally high and analyzed the performance of the known equity long-short factors. The factors with the highest average performance are HML (value stocks), long-term reversal, momentum, and energy stocks. On the other hand, tech stocks, bond-like assets, and the SMB factor should be avoided during the high inflation periods.

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Nuclear Threats and Factor Performance – Takeaway for Russia-Ukraine Conflict

31.March 2022

The Russian invasion of Ukraine and its repercussions continue to occupy front pages all around the world. While using nuclear forces in war is probably a red line for all of the mature world, there is still possible to use nuclear weapons for blackmailing. What will be the impact of such an event on financial markets? It’s not easy to determine, but we tried to identify multiple events in the past which were also slightly unexpected and carried an indication of nuclear threat and then analyzed their impact on financial markets.

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Factor Performance in Cold War Crises – A Lesson for Russia-Ukraine Conflict

8.March 2022

The Russia-Ukraine war is a conflict that has not been in Europe since WW2. And it has great implications not only on human lives but also on security prices. It bears numerous characteristics of the cold war crises, where two nuclear powers (Soviet Union and USA/NATO) were often very close to hot war or were waging a proxy war in 3rd countries. We thought it might be wise to look at similar periods from the past to understand what happens in such situations. We selected five events and analyzed the performance of main equity factors (market, HML, SMB, momentum & 2x reversal) and energy and fixed income proxy portfolios.

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