Impact of Dataset Selection on the Performance of Trading Strategies

14.November 2022

It would be great if the investment factors and trading strategies worked all around the world without change and under all circumstances. But, unfortunately, it doesn’t work like that. Some of the strategies are market-specific, as shown in this short analysis. The Chinese market has its own specifics, mainly higher representation of retail investors and lower efficiency. And it’s not alone; countless strategies work just in cryptocurrencies, selected futures, or some other derivatives markets. So, what’s the takeaway? Simple, it’s really important to understand that each anomaly is linked to the underlying dataset and market structure, and we need to account for it in our backtesting process.

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The Role of Interest Rates in Factor Discovery

24.October 2022

Over the past several decades, economists and quantitative scientists found a very large number of asset pricing anomalies and published numerous research papers about their findings, and this is known in the financial jargon as “factor zoo.” However, one strong underlying force might drive the performance of many of those anomalies. What’s that force? The level and trend in the interest rates, as in almost all parts of the developed world, there was a long-term steady decline in rates and inflation for nearly 40 years. We use the past tense as it seems that the situation changed at the beginning of this year…

Van Binsbergen, Jules H. and Ma, Liang and Schwert, Michael (Sep 2022) touched on this subject and made a careful examination of both past factor research and found that a significant part of published papers and developed models are sometimes unknowingly exposed to fitting to low or even zero interest rates.

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Stock-Bond Correlation, an In-Depth Look

19.October 2022

The recent surge in global inflation sent shock waves across financial markets and affected the complicated relationship between stocks and bonds. Today, we would like to present you with a review of two interesting papers, which provide both a deep and easy-to-understand examination of the correlation structure of those two main asset classes. The first paper reviews specifics in various parts of the world, and the second one summarizes known information about the macroeconomic drivers of the US stock-bond correlation.

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Are FOMC Announcements Really Informative?

14.October 2022

Federal Open Market Committee (FOMC) of Fed (Federal Reserve Board/System) meetings which bring announcements usually followed by press conferences are one of the most important events in the rich calendar of investors’ watch lists. They are always closely watched for possible trading opportunities and are full of volatile moves on both long and short sides in fronts of all asset classes ranging from forex, bonds, and equities to nowadays even crypto markets. In our today’s summary, we will take a closer look at some implications that those kinds of financial phenomena bring.

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How to Improve Post-Earnings Announcement Drift with NLP Analysis

11.October 2022

Post–earnings-announcement drift (abbr. PEAD) is a well-researched phenomenon that describes the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for some time (several weeks or even several months) following an earnings announcement. There have been many explanations for the existence of this phenomenon. One of the most widely accepted explanations for the effect is that investors under-react to the earnings announcements. Although we already addressed such an effect in some of our previous articles and strategies, we now present a handy method of improving the PEAD by using linguistic analysis of earnings call transcripts.

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The Hidden Costs of Corporate Bond ETFs

28.September 2022

Exchange-traded funds (ETFs) have been recently booming in popularity and enjoy great praise for their flexibility and accessibility in terms of liquidity. They allow investors convenient exposure to less liquid assets such as corporate bonds. But liquid ETF instrument based on illiquid assets is a recipe for a lot of hidden problems (and sometimes disasters), especially in such a turbulent period on fixed income markets as it’s now. There are various certain specifics which come with creation of new ETFs and problems for buying of underling prospects to match the fund’s NAV. Chris Reilly’s paper (2022) revolves around the point that ETF managers encourage Authorized Participants (APs) to more aggressively arbitrage tracking errors to the benefit of ETF investors while simultaneously allowing APs to interact strategically with ETF portfolios at the expense of ETF investors. Underlying asset liquidity is a first-order determinant of optimal security design for ETFs. While these ETFs do underperform their benchmark by greater than their stated net expense ratios (as much as claimed 48 bps p.a.), they still offer a liquid alternative for investors that do not have the resources to manage their own fixed income portfolio. This summary could be taken as a good reminder that investors’ expenses to obtain liquidity in the fixed income space are often quite substantial.

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