Impact of Business Cycles on Machine Learning Predictions

15.April 2024

As an old investing adage goes, “Everybody’s a genius in a bull market.” It is easy to fall victim to the Dunning-Kruger effect, where attribution bias makes us mistake our luck for abilities. When the business cycles change, there are great problems with precise stock price predictability. And this is not the only problem for humans, who are baffled by many mental heuristics. Machine learning algorithms experience similar problems, too. What is happening, and why is it so? A new paper by Wang, Fu, and Fan gives an explanation and proposes some remedies …

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FX Carry + Value + Momentum Strategies over Their 200+ Year History

11.April 2024

We mentioned multiple times that we at Quantpedia love historical analysis that spans over a long period of time as it offers a unique glimpse into the different macro environments and periods of political and economic instabilities. These long-term studies help a lot in risk management, and they also help investors set the right expectations about the range of outcomes in the future. Historical analysis of equity and fixed-income markets is not rare, but currency markets are less explored. Therefore, we are happy to investigate a recent paper by Joseph Chen that analyzes carry, momentum, and value strategies in the currency markets over the 200-year history.

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Music Sentiment and Stock Returns around the World

2.April 2024

There was a time in history when researchers believed that we, as a human species, act ultimately reasonably and rationally (for example, when dealing with financial matters). What arrived with the advent of Animal spirits (Keynes) and later Behavioral Finance pioneers such as Kahneman and Tversky was the realization that it is different from that. We often do not do what is in our best interest; quite the contrary. These emotions are hardly reconcilable with normal reasoning but result in market anomalies.

Researchers love to find causes and reasons and link behavioral anomalies to stock market performance. A lot of anomalies are related to various sentiment measures, derived from a alternative data sources and today, we present an interesting new possible relationship – investors’ mood and sentiment proxied by music sentiment!

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Cryptocurrency Market Dynamics Around Bitcoin Futures Expiration Events

27.March 2024

In the rapidly evolving landscape of cryptocurrency markets, understanding the underlying dynamics that drive price movements and investor sentiment can be a matter of survival. However, there are myriad facets of trading reality, and the only thing that we can do is to slowly understand them one after another, one step at a time. This article picks one corner of the cryptocurrency market and sheds a little light on it. We have already written a few times about the importance of the introduction of Bitcoin futures and their impact on the Bitcoin price. Therefore, in this article, we will specifically examine Bitcoin’s behavior around the critical events when Bitcoin futures expire.

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Which Stock Return Predictors Reflect Mispricing and Which Risk-Premia?

20.March 2024

The degree of stock market efficiency is a fundamental question of finance with considerable implications for the efficiency of capital allocation and, hence, the real economy. Return predictability is a cornerstone that allows investors to estimate their returns with ranging precision. Some anomalies allow one to exploit loopholes in global markets and capture substantial alpha, which violates the Efficient Market Hypothesis (EMH). However, whether this alpha arrives from risk premia or its source is mispricing is still puzzling academics around the globe, and they wrap their head around solving these tricky question.

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Portfolio Diversification Including Art as an Alternative Asset

15.March 2024

Alternative investment assets (also such as rare vintage and collectible items, expensive old high-quality alcohol, discontinued fashion, etc.) are a hit among wealthy investors, even though it is not easy to obtain direct or indirect exposure to diversified art investment(s) in a traditional finance kind of way. However, alternative assets are helpful in portfolio diversification as they last (if stored properly), usually appreciate in value (but sometimes not very predictably), and have a low correlation to traditional assets like stocks, real estate, gold, or fixed-income securities. Although alternative assets are highly illiquid and sometimes very challenging to value correctly, researchers are interested in them. We will closely look at one of the research papers that investigates the role of art in the portfolio, utilizing mean-variance optimization and less-used STL decomposition.

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