Improving FX Carry Strategy with Exotic Currencies and the Frontier Markets

31.January 2024

Forex markets lure retail traders into a game of “hunting pips” with high leverage and high turnover scalping strategies, in which small traders often lose more than they can afford. But there are other ways of trading currencies. The smart money knows how to exploit interest rate spreads that this asset class offers by employing the FX Carry Trade strategy. In the past decade, the low interest rates of the most developed countries made the FX Carry strategy less profitable, but as inflation returned, higher interest rates returned in some countries, too, and with them, the interest rate spreads widened. And FX Carry is back, and the question stands: Can we improve this well-known trading style?

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Join the Race: Quantpedia Awards 2024 Await You

26.January 2024

Two weeks ago, we promised you a surprise, and now it’s finally time to unveil what we have prepared for you :).

Our Quantpedia Awards 2024 aims to be the premier competition for all quantitative trading researchers. If you have an idea in your head about systematic/quantitative trading or investment strategy, and you would like to gain visibility on the professional scene, then submit your research paper, and you can compete for an attractive list of prizes. All info about the prizes, submission process, expert committee, and our partners are described in detail on our dedicated subpage: Quantpedia Awards 2024. But we will also give you a quick overview in this blog post.

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Are Cryptocurrencies Exposed to Traditional Factor Risks?

23.January 2024

Cryptocurrencies are attracting much attention, even becoming a priority for many high-net-worth investors. The introduction of the new spot Bitcoin ETFs simplifies access to this asset class, and as cryptos are included in more and more portfolios, industry practitioners look for models that can help assess how big a portion of clients’ portfolios allocate to this new asset class. Factor risk models are an industry standard for understanding other main asset classes, and authors of today’s presented research (Akbari, Ekponon, and Guo, revised 2024) provide useful insights into which factor risks can explain the variation in cryptos returns.

The main take-away? We can definitely shred the idea that crypto stands on its own, acting independently and in isolation from other financial world vehicles. Overall, these findings provide the evidence that well-known factor risks can explain crypto market returns and that a strong link exists between the crypto market and traditional asset classes.

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Exploration of CTA Momentum Strategies Using ETFs

18.January 2024

Commodity Trading Advisor (CTA) funds are commonly associated with managed futures investing; however, beyond commodities, they have the flexibility to venture into other assets, including interest rates, currencies, fixed income, and equity indices. Most of the CTA strategies are trend-following, taking long positions in markets experiencing upward trends and short positions in markets undergoing downward trends, with the expectation that these trends will persist. CTA funds demonstrate a negative correlation with traditional assets, especially evident during periods of pronounced downturns in equity markets, and this characteristic positions them as an appealing alternative investment option, serving as a protective measure against extreme events in financial markets. We aim to explore these trend-following strategies by creating a “CTA proxy” using ETFs across all asset classes. Using ETFs allows for maintaining the diversification of CTA funds and represents an alternative with easier data availability compared to futures contracts. Additionally, we are very interested in seeing the contribution of the short leg of CTA sub-strategies to performance, as we have a hypothesis that we can significantly improve the risk-return profile of the CTA strategies by removing a short leg portion of the strategy from some assets.

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Machine Learning Execution Time in Asset Pricing

16.January 2024

Machine Learning will quite certainly continue to be a hot topic in 2024, and we are committed to bringing you new developments and keeping you in the loop. Today, we will review original research from Demirbaga and Xu (2023) that highlights the critical role of machine learning model execution time (combination of time for ML training and prediction) in empirical asset pricing. The temporal efficiency of machine learning algorithms becomes more pivotal, given the necessity for swift investment decision-making based on the predictions generated from a lot of real-time data. Their study comprehensively evaluates execution time across various models and introduces two time-saving strategies: feature reduction and a reduction in time observations. Notably, XGBoost emerges as a top-performing model, combining high accuracy with relatively low execution time compared to other nonlinear models.

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Pragmatic Asset Allocation Model for Semi-Active Investors

11.January 2024

The primary motivation behind our study stems from an observation of the Global Tactical Asset Allocation (GTAA) strategies throughout the existing papers – the majority of them require relatively frequent rebalancing from the point of view of the ordinary investor. Portfolio rebalancing is usually done on a weekly or monthly basis, and while this period may seem overly boring and slow for the majority of traders (who like to trade on intraday or daily basis), fans of GTAA strategies are not traders; they are investors. Of course, some like to follow the ebbs and flows of the market. But a lot of investors just want to have a life. The financial market is not their hobby. However, on the other hand, they also do not want to hold just the passive buy & hold portfolio. Recognizing the demand for the semi-active strategy, we introduce our novel Pragmatic Asset Allocation.

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