Blogs

Sector Rotation Strategy

I. Introduction Sector Rotation is an asset allocation strategy which posits that certain sectors outperform others in different stages of the business cycle, and that the market can be outperformed by rotating a portfolio’s sector allocation based on the current phase of the business cycle. The sector rotation model has been around for decades, but [...]

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Betting with a Moving Kelly Ratio

The Kelly ratio gives the optimal percentage of an investor’s wealth to bet in order to maximize his long term growth rate. It was originally developed for betting with known odds and win ratios, for games such as blackjack and horse betting. However, it has its uses in investments as well. For a stock instrument, [...]

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Random Walks

Introduction The random walk hypothesis states that stock market prices evolve according to a stochastic process, preventing the prediction of future stock market movements.  The concept follows from the weak version of the efficient-market hypothesis, which asserts that future stock market movements are not correlated with past movements.  In other words, the movement of share [...]

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Turtle Breakout Trading Strategy Simulation

Introduction The “turtles” are a group of traders in the 1980's formed by Richard Dennis and William Eckhardt to study whether trading ability is determined by nature or nurture. The group’s story is covered in many books such as Market Wizards by Jack D. Schwager, Way of the Turtle by Curtis Faith (an original turtle), [...]

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Option Volume and Stock Prices

A 2003 paper by Pan and Poteshman entitled The Information in Option Volume for Stock Prices (found here), and highlighted by this 2006 New York Times article suggests that events in equity options markets can serve as predictors for trends in the stock market.  Their fundamental claims are two-fold:  first, that options traders are better [...]

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Reverse Stock Splits

A recent Motley Fool article discusses reverse stock splits and their implications for future performance: “Investors have to wonder:  Will reverse splits do any good, or are they basically the kiss of death for a company?”  With Palantir Finance, we can easily examine the short-term performance of companies that undergo reverse stock splits.  This question [...]

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The Fed Model

In this post, we will describe an equity trading strategy called the “Fed Model”.  The Fed Model refers to a method of evaluating equity markets versus fixed income markets, which claims that earnings yield of the S&P 500 (predicted forward earnings divided by the current price) can be compared to the yield of the 10-year [...]

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Yen Volatility

I was reading a blog entry by “Macro-Man” (http://macro-man.blogspot.com/2009/04/whats-up-with-yen-vols-other-than-yen.html) who noticed that despite the Yen being super strong, Yen volatility was relatively flat over the past few weeks: Because equity traders watch the yen, when volatility is coming off of the yen market, the appetite for risk is increasing, and the equity markets should mirror [...]

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Merton Model

This study explores an equity-factor based strategy that uses the spread between the Merton model equity implied credit spread and the five year CDS across names in the S&P500 index. It trades with the assumption that recently the credit markets are more accurately priced than the equity markets; therefore, a company with a CDS spread [...]

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Pairs Trading Strategy

In this study we explore a trading strategy that isolates pairs of instruments within a sector that are highly correlated. We enter a trade if the price paths of these instruments diverge, going long one instrument and short the other, with the assumption that their price paths will converge. We construct our strategy in four [...]

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