Diversification is hard to find nowadays because financial markets are becoming increasingly correlated. I found a good visually presentation of Cross Sectional Correlation of stocks in the S&P 500 index in the Trading correlation by D. Varadi and C. Rittenhouse article. Let’s compute and plot the average correlation among ... [Read more...]

Today I want to show how to use Volatility Position Sizing to improve strategy’s Risk Adjusted Performance. I will use the Average True Range (ATR) as a measure of Volatility and will increase allocation during low Volatility periods and will decrease allocation during high Volatility periods. Following are two ... [Read more...]

I came across a free source of Intraday Forex data while reading Forex Trading with R : Part 1 post. You can download either Daily or Hourly historical Forex data from the FXHISTORICALDATA.COM. The outline of this post: Download and Import Forex data Reference and Plot Intraday data Daily Backtest Intraday ... [Read more...]

I want to highlight two great Visualization techniques I discovered by reading the fine blog from Timely Portfolio. First method is based on the lm System on Nikkei with New Chart. Let’s visualize Strategy’s Long/Short/Not Invested periods by highlighting the underlying (i.e. buy & hold) with ... [Read more...]

RExcel is a great tool to connect R and Microsoft Excel. With a press of a button, I can easily execute my R scripts and present output interactively in Excel. This easy integration allows non-R users to explore the power R language. As an example of this approach, I want ... [Read more...]

I want to introduce the Transaction Cost and Execution Price functionality in the Backtesting library in the Systematic Investor Toolbox. The Transaction Cost is implemented by a commission parameter in the bt.run() function. You may specify the commissions in $ per share for “share” type backtest and as a percentage ... [Read more...]

David Varadi have recently wrote two posts about Gini Coefficient: I Dream of Gini, and Mean-Gini Optimization. I want to show how to use Gini risk measure to construct efficient frontier and compare it with alternative risk measures I discussed previously. I will use Gini mean difference risk measure – the ... [Read more...]

In the last post, Portfolio Optimization: Specify constraints with GNU MathProg language, Paolo and MC raised a question: “How would you construct an equal risk contribution portfolio?” Unfortunately, this problem cannot be expressed as a Linear or Quadratic Programming problem. The outline for this post: I will show how Equal ... [Read more...]

I have previously described a few examples of portfolio construction: Introduction to Asset Allocation Maximum Loss and Mean-Absolute Deviation risk measures 130/30 Portfolio Construction Minimum Investment and Number of Assets Portfolio Cardinality Constraints Multiple Factor Model – Building 130/30 Index (Update) I created a number of helper functions to simplify process of making ... [Read more...]

Nico brought to my attention the 130/30: The New Long-Only (2008) by A. Lo, P. Patel paper in his comment to the Multiple Factor Model – Building CSFB Factors post. This paper presents a very detailed step by step guide to building 130/30 Index using average CSFB Factors as the alpha model and MSCI ... [Read more...]

In the last post, Multiple Factor Model – Building Risk Model, I have shown how to build a multiple factor risk model. In this post I want to explain why do we need a risk model and how it is used during portfolio construction process. The covariance matrix is used during ... [Read more...]

This is the fourth post in the series about Multiple Factor Models. I will build on the code presented in the prior post, Multiple Factor Model – Building CSFB Factors, and I will show how to build a multiple factor risk model. For an example of the multiple factor risk models, ... [Read more...]

This is the third post in the series about Multiple Factor Models. I will build on the code presented in the prior post, Multiple Factor Model – Building Fundamental Factors, and I will show how to build majority of factors described in the CSFB Alpha Factor Framework. For details of the ... [Read more...]

This is the second post in the series about Multiple Factor Models. I will build on the code presented in the prior post, Multiple Factor Model – Fundamental Data, and I will show how to build Fundamental factors described in the CSFB Alpha Factor Framework. For details of the CSFB Alpha ... [Read more...]

The Multiple Factor Model can be used to decompose returns and calculate risk. Following are some examples of the Multiple Factor Models: The expected returns factor model: Commonality In The Determinants Of Expected Stock Returns by R. Haugen, N. Baker (1996) The expected returns factor model: CSFB Quantitative Research, Alpha Factor ... [Read more...]

THIS IS NOT INVESTMENT ADVICE. The information is provided for informational purposes only. In the Time Series Matching post, I used one to one mapping to the compute distance between the query(current pattern) and reference(historical time series). Following chart visualizes this concept. The distance is the sum of ... [Read more...]

This is a quick post to address comments raised in the Time Series Matching post. I will show a very simple example of backtesting a Time Series Matching strategy using a distance weighted prediction. I have to warn you, the strategy’s performance is worse then the Buy and Hold. ... [Read more...]

THIS IS NOT INVESTMENT ADVICE. The information is provided for informational purposes only. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. Do you want to know what S&P 500 will do in the next week, month, quarter? ... [Read more...]

Quantum Financier wrote an interesting article Regime Switching System Using Volatility Forecast. The article presents an elegant algorithm to switch between mean-reversion and trend-following strategies based on the market volatility. Two model are examined: one using the historical volatility and another using the Garch(1,1) Volatility Forecast. The mean-reversion strategy is ... [Read more...]

This is just a quick note to wish you and your family a very healthy and happy holidays and wonderful New Year! I hope you enjoyed reading my blog and thank you for your comments and emails. Here is a short R code that implements an interesting idea from the ... [Read more...]