Here are some trading- and markets-related articles for the thus inclined. Previously posted on this weekend:Best of The Week: from my this week's posts
Weekly Support: weekly reviews and previews
Crisis & Views: crisis and asset class views
Economics: articles and journal papers from recent months
METHODS
An Introduction to 6 Machine Learning Models – DZone
Decision Tree, linear regression, neural network, Bayesian network, support vector machine, nearest neighbor
Vector Autoregressive Models – Lütkepohl / European University Institute (pdf)
Testing for multivariate cointegation in the presence of structural breaks: p-values and critical values – Applied Economics Letters
Preview of the first page, article can be bought online
Consistent Long-Term Yield Curve Prediction – arXiv
We present an arbitrage-free non-parametric yield curve prediction model which takes the full (discretized) yield curve as state variable. We believe that absence of arbitrage is an important model feature in case of highly correlated data, as it is the case for interest rates. Furthermore, the model structure allows to separate clearly the tasks of estimating the volatility structure and of calibrating market prices of risk.
The Difference Between Interaction and Association – The Analysis Factor
In statistics, they have different implications for the relationships among your variables, especially when the variables you’re talking about are predictors in a regression or ANOVA model.
Math: Free Courses – openculture.com
Get free Math courses from the world’s leading universities. You can download these audio & video courses straight to your computer or mp3 player. For more online courses, visit our complete collection of Free Courses.
PORTFOLIO MANAGEMENT
Research Review: Portfolio Strategy – The Capital Spectator
Multiple Factor Model
Fundamental Data – Systematic Investor
Building Fundamental Factors – Systematic Investor
Building CSFB Factors – Systematic Investor
Building 130/30 Index – Systematic Investor
Do Low Vol Tactics Matter? – Falkenblog
An important question for any strategy is how important tactics are. That is, for some strategies, tactics are unimportant because the algorithm has a 'flat maximum', where lots of parameters generate outputs very nearly as good as the optimal parameters.
The "Out of Sample" Performance of Long-run Risk Models – NBER
The long-run risk models perform relatively well on the momentum effect. A cointegrated version of the model outperforms the classical, stationary version. Both the long-run and the short run consumption shocks in the models are empirically important for the models’ performance. The models’ average pricing errors are especially small in the decades from the 1950s to the 1990s. When we restrict the risk premiums to identify structural parameters, this results in larger average pricing errors but often smaller error variances. The mean squared errors are not substantially better than those of the classical CAPM, except for Momentum.
The long-run risk models perform relatively well on the momentum effect. A cointegrated version of the model outperforms the classical, stationary version. Both the long-run and the short run consumption shocks in the models are empirically important for the models’ performance. The models’ average pricing errors are especially small in the decades from the 1950s to the 1990s. When we restrict the risk premiums to identify structural parameters, this results in larger average pricing errors but often smaller error variances. The mean squared errors are not substantially better than those of the classical CAPM, except for Momentum.
A Comprehensive Look at Financial Volatility Prediction by Economic Variables – BIS (pdf)
We investigate if asset return volatility is predictable by macroeconomic and financial variables and shed light on the economic drivers of financial volatility.
What Works Best? – CXO Advisory
Several readers have asked, of all the active investing/trading strategies investigated by research summarized in the blog, which ones that individual investors can practically implement work best.
Combining Value and Momentum Approaches – World Beta
What does ‘passive investing’ really mean? – Portfolio Probe
In reality an index is just someone’s trading strategy that has come to be set in stone. There are reasons to be concerned about index funds.
Death For Buy & Hold? Where Is Thy Sting? – The Capital Spectator
The conceit here is that the future will be unusually harsh on betas, but alpha will be unaffected and perhaps even shine brighter. The interview with Lo doesn't convincingly explain why this scenario is likely to unfold. Meanwhile, history gives us quite a bit of evidence to remain skeptical that the future will be much different when it comes to the relationship between beta and alpha.
Measuring market liquidity: An introductory survey – arXiv
Providing a rigorous and empirically relevant definition of market liquidity has, however, provided to be a difficult task. This paper provides a critical review of the frameworks currently available for modelling and estimating the market liquidity of assets. We consider definitions that stress the role of the bid-ask spread and the estimation of its components that arise from alternative sources of market friction. In this case, intra-daily measures of liquidity appear relevant for capturing the core features of a market, and for their ability to describe the arrival of new information to market participants.
Sabrient’s Insider Trading Model and Abnormal Returns – HistorySquared
OTHER
Trade to improve your portfolio – Abnormal Returns
The fact of the matter is that even the most well-crafted investment strategy will have periods of underperformance.
Social Media Sentiment Analysis – Thomson Reuters
an extension of our machine-readable news offering to include a sentiment scoring service for social media. The new capability will mine the expansive wealth of social media and blog content to deliver digestible analytics on selected companies and market segments
Trading Rules, Aphorisms & Books (Updated) – The Big Picture
Research Review: Socially Responsible Investing – The Capital Spectator
Edward Tufte shows us how to present data and info – The Big Picture
Equity Risk Premiums: The 2012 Edition – Musings on Markets
Low (and high) volatility strategy effects – Portfolio Probe
Does minimum variance act differently from low volatility? Do either of them act like low beta? What about high volatility versus high beta?
***
***
Hedge Fund Market Wizards – Amazon
Jack D. Schwager, the author of the classic Market Wizards-books, is coming out with a new book, other books by Schwager here. The book is out in May, preorder now.