Quantpedia in July 2023

8.August 2023

Hello all,

What have we accomplished in the last month?

– A new Technical Analysis report for Quantpedia Pro subscribers
– 11 new Quantpedia Premium strategies have been added to our database
– 9 new related research papers have been included in existing Premium strategies during the last month
– Additionally, we have produced 8 new backtests written in QuantConnect code
– And finally, 5 new blog posts that you may find interesting have been published on our Quantpedia blog in the previous month

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Exploring the Factor Zoo with a Machine-Learning Portfolio

3.August 2023

The latest paper by Sak, H. and Chang, M. T., and Huang, T. delves into the world of financial anomalies, exploring the rise and fall of characteristics in what researchers refer to as the “factor zoo.” While significant research effort is devoted to discovering new anomalies, the study highlights the lack of attention given to the evolution of these characteristics over time. By leveraging machine learning (ML) techniques, the paper conducts a comprehensive out-of-sample factor zoo analysis, seeking to uncover the underlying factors driving stock returns. The researchers train ML models on a vast database of firm and trading characteristics, generating a diverse range of linear and non-linear factor structures. The ML portfolio formed based on these findings outperforms entrenched factor models, presenting a novel approach to understanding financial anomalies. Notably, the paper identifies two subsets of dominant characteristics – one related to investor-level arbitrage constraint and the other to firm-level financial constraint – which alternately play a significant role in generating the ML portfolio return.

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How Well Do Factor Investing Funds Replicate Academic Factors?

31.July 2023

Cremers, Liu, B. Riley (Apr 2023) share their view on and try to answer the question: how well do factor investing funds perform? They conclude that, on average, factor-investing funds do not outperform. But using active characteristic share (ACS)—an adaption of Cremers and Petajisto’s (2009) original active share measure—, the authors demonstrate that the factor investing funds that match indexes the most have significantly better performance. An equal-weighted portfolio of factor investing funds in the lowest tercile of ACS outperforms an equal-weighted portfolio of funds in the highest tercile by 3.82% per year (t-stat = 3.89) using the CAPM and by 1.08% per year (t-stat = 2.01) using the CPZ6 model.

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Top Models for Natural Language Understanding (NLU) Usage

27.July 2023

In recent years, the Transformer architecture has experienced extensive adoption in the fields of Natural Language Processing (NLP) and Natural Language Understanding (NLU). Google AI Research’s introduction of Bidirectional Encoder Representations from Transformers (BERT) in 2018 set remarkable new standards in NLP. Since then, BERT has paved the way for even more advanced and improved models.

We discussed the BERT model in our previous article. Here we would like to list alternatives for all of the readers that are considering running a project using some large language model (as we do 😀 ), would like to avoid ChatGPT, and would like to see all of the alternatives in one place. So, presented here is a compilation of the most notable alternatives to the widely recognized language model BERT, specifically designed for Natural Language Understanding (NLU) projects.

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Optimal Market Making Models with Stochastic Volatility

25.July 2023

The emergence of high-frequency trading has led to improvements in numerous algorithmic trading strategies. Consequently, there is a growing demand for quantitative analysis and optimization techniques to develop these strategies. We present a paper by Aydoğan et al. (2022), which discusses the derivation of the optimal prices for HFT to execute the limit buy and sell orders where a stochastic volatility model generates the mid prices of the assets in the market.

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Beta-Adjusting Factor Returns

20.July 2023

Beta-adjusted returns equity factors are considerably more stable, indicating that factor construction methodologies may be improved beyond dollar and size neutrality. Low-beta effect at the level of factors confirms the existence of seasonal and momentum effects in the cross-section of factor returns. Altogether, these insights deepen the understanding of factor behavior and can aid the development of more robust factor-based investment strategies.

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