Finding alphas : a quantitative approach to building trading strategies

230 Pages·2015·4.32 MB·English

FINDING ALPHAS
A QUANTITATIVE APPROACH TO BUILDING TRADING
STRATEGIES
Igor Tulchinsky et al.
WorldQuant Virtual Research Center
This edition first published 2015
© 2015 Igor Tulchinsky et al., WorldQuant Virtual Research Center
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ISBN 978-1-119-05786-4 (hbk) ISBN 978-1-119-05788-8 (ebk)
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Dedicated to All at WorldQuant – The Future of Trading
Contents
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
Note
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?
Note
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
Notes
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
Note
16 Techniques for Improving the Robustness of Alphas
Simple Methods for Robustness Improvement
Advanced Methods for Robustness Improvement
Conclusions
Note
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
Notes
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
Notes
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
EULA
LIST OF TABLES
Chapter 1
Table 1.1
Table 1.2
Chapter 6
Table 6.1
Table 6.2
Table 6.3
Table 6.4
Chapter 22
Table 22.1
Table 22.2
Table 22.3
Table 22.4
Chapter 23
Table 23.1
Table 23.2
Table 23.3
Table 23.4
Chapter 28
Table 28.1
Table 28.2
Table 28.3
Chapter 29
Table 29.1
Table 29.2
Table 29.3
Chapter 30
Table 30.1
Table 30.2
Table 30.3
Chapter 31
Table 31.1
Table 31.2
Table 31.3
Table 31.4
Table 31.5
Chapter 32