Consider a market-timing strategy which supposedly predicts the direction of the stock market trend. Such a strategy generates Buy and Sell signals. A Buy signal is the signal to buy stocks, whereas a Sell signal [...]
The topic of this blog post was inspired by Wes, who said the following: Valeriy, you have done more formal academic research on trend-following than anyone I know...Skepticism aside, let's I forced you to pick [...]
In our final blog post, that finishes the trend-following series, we briefly review the results of the forward-tests of the profitability of various trend following rules in different financial markets: stocks, bonds, currencies, and commodities. [...]
The Standard and Poor's (S&P) 500 index is a value-weighted stock index based on the market capitalizations of 500 large companies in the US. This index was introduced in 1957 and intended to be a [...]
The difficulty in testing the profitability of trend-following rules stems from the fact that the procedure of testing involves either a single- or multi-variable optimization. Specifically, any trading rule considered in Part 3 has at [...]
We consider an investor and a financial market that consists of only two assets: one risky asset and one safe (or risk-fee) asset. An example of a risky asset is an investable stock market index. [...]
In our context, a technical trading indicator can be considered as a combination of a specific technical trading rule with a particular moving average of prices. In two preceding blog posts we showed that there [...]
A trend following strategy is based on switching between a financial asset and cash depending on whether the asset prices trend upward or downward. Specifically, when the strategy identifies that prices trend upward (downward), it [...]
In this post we aim to give an overview of some specific types of moving averages. Specifically, we cover "ordinary" moving averages and mention some examples of exotic moving averages.
One of the basic principles of technical analysis is that ``prices move in trends". Traders firmly believe that these trends can be identified in a timely manner and used to generate profits and limit losses. Consequently, trend following is the most widespread market timing strategy; it tries to jump on a trend and ride it. Specifically, when stock prices are trending upward (downward), it's time to buy (sell) the stock. Even though trend following is very simple in concept, its practical realization is complicated. One of the major difficulties is that stock prices fluctuate wildly due to imbalances between supply and demand and due to constant arrival of new information about company fundamentals. These up-and-down fluctuations make it hard to identify turning points in a trend. Moving averages are used to ``smooth" the stock price in order to highlight the underlying trend.
Well, it's my birthday today, so I'm getting older, but I'm in high spirits because younger people are so excited to learn new things. Over the past week, a few younger blog readers (and even some [...]
Active management has been out of favor for a while--high fees, high tax burdens, and poor long-term performance. But with the slow rise of actively managed ETFs, which have lower costs and more tax efficiency [...]
Investors should know what they are buying and why they are buying it. Unfortunately, more often than not, investment products are jammed down the throats of unsuspecting victims who are either ignorant, easy to influence, [...]
Over the past 10+ years I've cultivated a laundry list of websites associated with financial economics. My primary focus has been identifying sources for new ideas that are creative, unique, and have application in the real-world. Interestingly [...]
What We Do? We are a research-intensive asset management firm with a focus on high-conviction value and momentum factor exposures. More broadly, we seek to deliver "Affordable Alpha," which means highly differentiated investment strategies at lower costs, thereby giving sophisticated [...]
Wild-swinging oil prices have caused some chaos, or "volatility," in the financial markets recently. We've also heard a lot in the financial media regarding the strong performance of "low volatility" funds. But what exactly is [...]
Robust asset allocation solutions should be relatively simple, minimize complexity, and be robust across different market regimes. Simultaneous to these requirements, the solution must be affordable, liquid, simple, tax-efficient, and transparent, otherwise, many of the benefits of the solution will flow to the croupiers and Uncle Sam. We recommend that investors explore our robust asset allocation framework and go for the do-it-yourself solution. You'll be paying yourself 1%+ a year via saved RIA fees. Is this the only solution? No. But any solution must be robust, simple, tax-manageable, and low-cost. This is our best effort to develop a simple model. Developing a complicated model is easy; simple is difficult.
Benjamin Graham, who first established the idea of purchasing stocks at a discount to their intrinsic value more than 80 years ago, is known today as the father of value investing. Since Graham’s time, academic research has shown that low price to fundamentals stocks have historically outperformed the market. In the investing world, Graham’s most famous student, Warren Buffett, has inspired legions of investors to adopt the value philosophy. Despite the widespread knowledge that value investing generates higher returns over the long-haul, value-based strategies continue to outperform the market. How is this possible? The answer relates to a fundamental truth: human beings behave irrationally. We are influenced by an evolutionary history that preserved traits fitted for keeping us alive in the jungle, not for optimizing our portfolio decision-making ability. While we will never eliminate our subconscious biases, we can minimize their effects by employing quantitative tools.
Introduction to Finance: Class 8 Risks & Returns What are risks & returns? When it comes to financial matters, we all know what risk is -- the possibility of losing your hard-earned cash. And [...]
Introduction to Finance: Class 7 Lessons from Capital Market History What is a capital market? Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital [...]