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17

I know that I have seen things like this in the past. Wasn't there something recently that used Twitter? Here are a few recent papers as examples, although I will be brutally honest that I don't know if they speak to your decent quality requirement: "Trading Strategies to Exploit Blog and News Sentiment" (Zhang, Skiena 2010) "The Predictive Power of ...

16

The lead paper in the January 2011 Journal of Finance (Hendershott, Jones, and Menkveld) addresses algorithmic trading (AT). In short, they find that AT improves liquidity as measured by bid-offer spreads. Taking the econometrics as correct (it is in the Journal of Finance) the next question is if bid-offer spreads are a sufficient statistic for measuring ...

15

By "cryptography" you mean information theory. Information theory is useful for portfolio optimization and for optimally allocating capital between trading strategies (a problem which is not well addressed by other theoretical frameworks.) See: J. L. Kelly, Jr., "A New Interpretation of Information Rate," Bell System Technical Journal, Vol. 35, July ...

10

Below, I see a lot of support and resistance. Here's the code: x <- cumsum(rnorm(1000)) plot(x, type="l", main="Support and Resistance") Edit (03/03/2011) ================================================ Gortaur, I put my answer here to avoid filling up the comment area. Your question 1) "......I was not asking for the "garbage" literature, I can ...

10

Just FYI the Reuters product is called NewsScope. The selling point is that they provide a sentiment reading per news item so the user doesn't have to do any NLP. If you have a Reuters sales rep or contact them then they can get you several research/white papers that are interesting. Here are the ones I have been able to find online (my sales rep has ...

10

I find this one very helpful: Re-Examining the Hidden Costs of the Stop-Loss by Wilson Ma, Guy Morita, Kira Detko Abstract: In this paper, we present general implications of the impact of stop-losses to future returns. The use of stop-losses change return distributions, but not in the way that one would typically expect. We find that while ...

10

ArXiv is the standard resource of preprints in the field of physics. Almost all papers in physics are uploaded here before they are submitted to a journal. They also have a quantitative finance part: http://arxiv.org/archive/q-fin This section is not nearly as active as the physics-part of ArXiv though. Hopefully this will change in the future. There is ...

9

One might probably mention Yale's Endowment under David Swensen which generated returns of 13% per annum over the past two decades (as compared to the 8 or 9% average return of college and university endowments). Now, I would not label Swensen's approach to portfolio management with a pure absolute return strategy tag but he definitely uses some insights ...

9

I did some digging and found the following papers - most of them offering quite a distinct perspective compared to classical option pricing theory! Stock Options as Lotteries by Brian H. Boyer et al. (2011) The Efficiency of the Buy-Write Strategy: Evidence from Australia by Tafadzwa Mugwagwa et al. (2010) The following is my favorite: You could do some ...

9

Yes Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes Strategic Asset Allocation and Commodities The Case for Commodities An Asset Class for All Seasons: The Benefits of a Strategic Allocation to Commodities No Should Investors Include Commodities in Their Portfolios After All? New Evidence My Take Although there ...

9

Very good question! I think part of the answer lies in the structure of the financial industry. Some anomalies have a certain kind of structure which cannot be exploited by the players that are big enough to let the anomaly disappear. I would put e.g. the Turn-of-the-month effect (TOTM) into this category since big funds just can't turn their whole ...

8

That's a tough question to answer. The "quant business" is a business. Some quants sell low-grade/low-volatility results, some sell fast-moving/unpredictable results, some sell industry targeted results, etc. It depends on what the buyer wants to buy. There's a market for everything. Haven't we all met people that think they're going to win the ...

8

I honestly think that most people who could be able to answer to this question simply won't either because they actually work for Renaissance, or because they work in a top quant hedge fund and they'll keep it a secret. I discussed this topic once during an interview and the guy said "we'll discuss this further if you get the job" lol. About papers, I'm ...

8

In a very, very general sense, what Renaissance Technologies does well [and others try to do, many do less well] is understand where the "true" signal is (i.e. where prices should be) and what is noise (i.e. over-/under-reactions by others in the market) in the total signal of market prices. Generally, trading profits are made by taking the opposing ...

8

This answer is my ongoing attempt to consolidate some recent commentary on this hot topic. A good place to start for anyone thinking about this question is the Economists's Buttonwood: Not So Fast, which mentions recent research by Biais and Woolley (2011) and Dichev, Huang, and Zhou (2011). Does Algorithmic Trading Improve Liquidity? This paper claims ...

7

The $R^2$s are usually close to zero for single stock regressions. The big $R^2$s that a lot of asset pricing research shows is by forming portfolios. Forming portfolios cancels a lot of the idiosyncratic returns, which has a smoothing effect. The $R^2$s should be low here, although I don't see any in the paper for you to compare. This probably means they ...

7

Nick Higham happens to have given a talk on this very subject this summer; he continues to actively work to improve nearest correlation matrix algorithms. You can see his talk and notes here: http://mxm.mxmfb.com/rsps/ct/c/629/r/90368/l/48110

6

A cautionary tale on all these approaches it told by Tim Loughran and Bill MacDonald in the Journal of Finance, 2011 (When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10-Ks, here). In their analysis they show that the commonly used Harvard Psychosociological Dictionary is inadequate for sentiment classification in a financial ...

6

Deutsche Bank's Quantitative Strategy (US) team put together the following piece on this topic (note: their research is available for clients, but I found that somebody uploaded the piece to a sketchy web site). In case the link dies, some of the academic papers they site are: Akbras, F., E. Kocatulum, and S. Sorescu, 2008, “Mispricing following public ...

6

I believe the reason no one has been able to come up with an example of a quant fund employing the academic factor-based approach with stellar performance is because there aren't any (at least not any with decent sized AUM). For a while, now, there has been a debate amongst institutional investors and quantitative professionals as to whether quant is dead. ...

6

DSpace@MIT - High frequency trading system design and process management (non-printable) This thesis provides a detailed study composed of high frequency trading system design, system modeling and principles, and processes management for system development. Particular emphasis is given to backtesting and optimization, which are considered the most ...

6

A very conservative stand is to distinguish between anomalies and arbitrage opportunities. Roughly speaking, while an arbitrage opportunity is risk-free by definition, an anomaly allows for unaccounted risk factors. It is the magnitude of these unidentified risk factors that might determine the long term persistance of certain anomalies. A good starting ...

6

The short answer is that I don't know, but your question gives some hints about how to find out. The key thing for me is that you want a minimum variance portfolio. I don't think you should be thinking about some abstract mathematical operation that is "best", but rather look over a few mathematical operations and see which seems to work best for your ...

6

I assume that by "how much research" you mean "could you provide me with some links".... So, as @Shane mentioned in its comment, a hedge fund recently started and is focusing on twitter analysis (here is another link). From what I understand they are basically implementing a trend-following strategy based on the "mood" of twitter users (I, of course, don't ...

6

There's a strong theoretical argument that makes the case for active management that is also supported by empirical research. First, check out Jonathan Berk's paper "Five Myths of Active Management". The paper reads like a clever Gedankenexperiment. Starting with a theoretical approach is better than starting with an empirical approach because as Berk ...

6

Joel Hasbrouck (imho, a leading expert in market microstructure) has a paper on this: http://people.stern.nyu.edu/jhasbrou/Research/Working%20Papers/HS10-11-10.pdf From the abstract: Our conclusion is that increased low-latency activity improves traditional market quality measures such as short-term volatility, spreads, and displayed depth in the limit ...

6

I highly doubt there are useful studies around. Think about it, the answers of such data sets must be highly skewed simply because there are price takers in the market that are extremely secretive about profits and losses. You will only get one side of the story and it most likely skews the results by quite a bit. Also, keep in mind many institutions do ...

5

I have been learning more about speech recognition motivated by its application to financial forecasting. I have identified a couple connect points. Turns out each of these tools can and are regularly used in financial modeling as well. Use of Markov Models Use of Fourier transforms (sine/cosine decompositions) Use of component analysis

5

By definition, the average investor holds the market portfolio. Risk aversion can be measured as the slope (i.e. ratio of expected returns to volatility) on the efficient frontier. Therefore, the risk aversion of the average investor assuming the S&P500 is the proxy for the market portfolio is the expected returns of the S&P 500 divided by the ...

5

Contrary to popular belief, there does exist some truly high quality academic literature on this topic. The most sophisticated and well executed paper in this regard is Lo, Mamaysky, and Wang (2000). They write: In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and we ...

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