Finding Alphas

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Igor Tulchinsky. Finding Alphas

Preface

Acknowledgments

About the WebSim™ Website

WEBSIM™ RESEARCH CONSULTANTS

PART I. Introduction

1. Introduction to Alpha Design

HOW ARE ALPHAS REPRESENTED?

HOW DOES ONE DESIGN AN ALPHA BASED ON DATA?

QUALITY OF AN ALPHA

ALGORITHM FOR FINDING ALPHAS

2. Alpha Genesis – The Life-Cycle of a Quantitative Model of Financial Price Prediction

BACKGROUND

CHALLENGES

THE LIFE-CYCLE OF ALPHAS

DATA INPUT

PREDICTIVE OUTPUT

EVALUATION

LOOKING BACK

STATISTICS! = STATISTICAL ARBITRAGE

TO SUM IT UP

3. Cutting Losses

HOW DO WE APPLY THE PRINCIPLE OF THE UNRULE AND OF CUTTING LOSSES?

SUMMARY

PART II. Design and Evaluation

4. Alpha Design

CATEGORIZATION OF ALPHAS

DEVELOPMENT OF AN ALPHA

VALUE OF AN ALPHA

PRACTICAL ALPHA EVALUATION

FUTURE PERFORMANCE

5. How to Develop an Alpha. I: Logic with an Example

STEP 1 → COLLECT INFORMATION

STEP 2 → COME UP WITH AN IDEA

STEP 3 → TRANSLATE INTO A MATHEMATICAL EXPRESSION

STEP 4 → TRANSFORM THE RAW EXPRESSION BY APPLYING OPERATIONS

STEP 5 → FINAL ROBUST ALPHA

STEP 6 → TRANSLATE INTO POSITIONS IN A FINANCIAL INSTRUMENT

STEP 7 → CHECK FOR ROBUSTNESS

6. How to Develop an Alpha. II: A Case Study

7. Fundamental Analysis

8. Equity Price and Volume

9. Turnover

WHAT IS TURNOVER?

DOES THAT MEAN LOWERING TURNOVER WILL RESULT IN LOWER RETURN?

HOW DOES LIQUIDITY FACTOR INTO THIS?

DOES THE ALPHA ITSELF PLAY A ROLE?

SO WHAT IS THE RIGHT TURNOVER FOR AN ALPHA?

10. Backtest – Signal or Overfitting

BACKTEST

OVERFITTING

HOW TO AVOID OVERFITTING

11. Alpha and Risk Factors

12. The Relationship between Alpha and Portfolio Risk

PORTFOLIO RISK

ALPHA

LESS BETA, MORE ALPHA

THINGS TO REMEMBER

13. Risk and Drawdowns

DRAWDOWNS

PERFORMANCE MEASURES FOR RISK AND ANTICIPATING DRAWDOWN

SUMMARY

14. Data and Alpha Design

HOW WE FIND DATA FOR ALPHA

DATA VALIDATION

UNDERSTAND THE DATA BEFORE USING IT

EMBRACE THE BIG DATA ERA

15. Statistical Arbitrage, Overfitting, and Alpha Diversity

16. Techniques for Improving the Robustness of Alphas

SIMPLE METHODS FOR ROBUSTNESS IMPROVEMENT

ADVANCED METHODS FOR ROBUSTNESS IMPROVEMENT

CONCLUSIONS

17. Alphas from Automated Search

IT IS A GOOD IDEA TO MAKE THE INPUT DATA RATIO-LIKE

INPUT DATA SHOULD NOT COME FROM TOO MANY CATEGORIES

IT IS NOT TRUE THAT THE LONGER THE TESTING PERIOD THE BETTER

SENSITIVITY TESTS AND SIGNIFICANCE TESTS ARE IMPORTANT

18. Algorithms and Special Techniques in Alpha Research

BOOSTING

DIGITAL FILTERING

FEATURE EXTRACTION

PART III. Extended Topics

19. Impact of News and Social Media on Stock Returns

NEWS

SOCIAL MEDIA

20. Stock Returns Information from the Stock Options Market

VOLATILITY SKEW

VOLATILITY SPREAD

OPTIONS TRADING VOLUME

OPTIONS OPEN INTEREST

21. Introduction to Momentum Alphas

22. Financial Statement Analysis

THE BALANCE SHEET

THE INCOME STATEMENT

THE CASH FLOW STATEMENT

GROWTH

CORPORATE GOVERNANCE

FACTOR ANALYSIS IN NON-US MARKETS

23. Institutional Research 101

ACADEMIC RESEARCH ON FINANCIAL MARKETS – NEEDLE MEETS HAYSTACK?

ANALYST RESEARCH

24. Introduction to Futures Trading

COMMITMENT OF TRADERS REPORT BY THE COMMODITY FUTURES TRADING COMMISSION

SEASONALITY IN MARKETS

RISK ON AND RISK OFF

CONTANGO/BACKWARDATION

25. Alpha on Currency Forwards and Futures

KEY MARKET FEATURES

UNDERLYING FACTOR EXPOSURE

CONSEQUENCES OF INSTRUMENT GROUPING

BASIC CHECKLIST FOR ALPHA TESTING

SUMMARY

PART IV. New Horizon – WebSim™

26. Introduction to WebSim™

27. Alphas and WebSim™ Fundamentals

ALPHAS AND WEBSIM™

ALPHA SOURCES

NEUTRALIZATION

UNIVERSE

28. Understanding How WebSim™ Works

SIMULATION SETTINGS PANEL

RUN YOUR FIRST ALPHA

ANOTHER SAMPLE ALPHA

29. API Reference

AVAILABLE MARKET DATA

AVAILABLE OPERATORS

30. Interpreting Results and Alpha Repository

SHARPE RATIO BRACKET

SIMULATION RESULTS

MY ALPHAS PAGE

ERRORS AND WARNINGS

QUICK RECAP

31. Alpha Tutorials

ALPHA EXPRESSION EXAMPLES

HOW TO CODE ALPHAS IN PYTHON

PYTHON ALPHA EXAMPLES

32. FAQs

WEBSIM™

ALPHA EXPRESSIONS, MARKET DATA, AND FUNCTIONS

OPERATIONS

ALPHA PERFORMANCE

33. Suggested Readings

FINANCE BASICS

CLASSICAL PAPERS FOR QUANT RESEARCH

OVERFITTING RISK AND WHERE TO FIND ALPHAS

ALPHA RESEARCH PAPERS

PART V. A Final Word

34. The Seven Habits of Highly Successful Quants

References

Index

Отрывок из книги

This book is a study of the process of finding alphas. The material is presented as a collection of essays, providing diverse viewpoints from successful quants on the front lines of quantitative trading.

A wide variety of topics is covered, ranging from theories about the existence of alphas, to the more concrete and technical aspects of alpha creation.

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This is the very reason why it is of utmost importance to cut losses when riding the changing sea of UnRules. How can this be mastered? What is the correct way to deal with the millions of shifting rules, all of them imperfect and often conflicting, based on different sets of circumstances and assumptions?

Trading is a microcosm of reality, a dynamic environment of immense complexity in which billions of participants act based on billions of rules and beliefs, which, in turn, affect the environment. The challenge in trading is, of course, to derive the rules that describe the markets, and then use them successfully to earn profits without changing those markets in such a way that the rule itself is destroyed.

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