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| What is Quantitative Easing? |
Following infograph provides a quick summary on what is Quantitative Easing.
The first part is available here. If you haven't read before then probably it is good idea to read for continuity. In the last post, we covered performance profile of risk parity and trend following respectively when applied to broad asset classes.
The next test is to check how risk parity and trend following overlays (individually and later together) fare when they are applied on sub-components of the broad asset classes.
Tables-3 & 4 provides the performance details along with my annotations. Gist is risk parity doesn't do well. Trend following overlay on top of risk parity improves performance. Trend following overlay as a stand-alone without risk parity has better performance of the three combinations.
The authors next investigate portfolio performance when a momentum is applied both as standalone overlay and in combination with trend following on sub-components of the broad asset classes.
Momentum is a relative concept i.e., an asset can be going down but still have high momentum rank. Whereas trend following is an absolute concept i.e., either the asset is in uptrend and a candidate for asset allocation or it is in downtrend and not a candidate for asset allocation. So combination of these two is attractive and will ensure only assets that are in uptrend and have high momentum will pass. Following table has performance details of this combo overlay along with annotations.
I will cover the remaining paper in next post. Please let me know if you find this format interesting. Wish you all good health & good trading!
The next test is to check how risk parity and trend following overlays (individually and later together) fare when they are applied on sub-components of the broad asset classes.
The authors next investigate portfolio performance when a momentum is applied both as standalone overlay and in combination with trend following on sub-components of the broad asset classes.
Momentum is a relative concept i.e., an asset can be going down but still have high momentum rank. Whereas trend following is an absolute concept i.e., either the asset is in uptrend and a candidate for asset allocation or it is in downtrend and not a candidate for asset allocation. So combination of these two is attractive and will ensure only assets that are in uptrend and have high momentum will pass. Following table has performance details of this combo overlay along with annotations.
I will cover the remaining paper in next post. Please let me know if you find this format interesting. Wish you all good health & good trading!
A nice infograph that explains Stan Weinstein market stages. I think one is much better off using a structure like this to model market and develop setups to play each phase. Instead the route pursued by majority is to get lost in myriad of patterns, equations and trading knowledge accumulation.
Question to ponder - how effective is my R&D and how is it different from majority?
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| Understanding Market Structure |
Be yourself! Everyone else is already taken. ~ Oscar Wilde
Recently I came across following paper - The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation. The paper basically examines the effectiveness of Risk Parity, Trend Following and Momentum approaches for global asset allocation between equities, bonds, commodities and real estate. The paper methodically goes through each of the approaches and later various combinations of them.
Risk Parity Approach
The paper assigns portfolio weights proportional to the inverse of observed volatility. In other words, at the end of each month we calculate the volatility of the asset over last one year and inverse of that is the portfolio weight for that asset for that month.
Trend Following Approach
Under this approach, buy an asset if the asset class price is above X-month moving average. Sell the asset, if price is below the X-month average and invest the proceeds in US 3-month Treasury bills. Signals are determined on end of month basis. No shorts. Only buys.
Finally, each asset class has an equal weight in the portfolio. That means if all 5 assets price is above X-month moving average, then each asset gets 20% of the portfolio weight. Instead, if only 3 assets has price above the moving average, then each of those 3 assets gets 20% of portfolio with rest in 3-month Treasury bills.
Momentum Approach
Under this approach, at the end of each month all the asset classes are ranked based on their performance over last 12 months. Then buy the top quarter of the ranked assets and sell any assets in portfolio that are not in top quarter. Repeat this every month.
Another alternative is to buy the top half of the ranked assets and sell any assets that are not in top quarter. Finally each asset class has an equal weight in the portfolio.
The table provides performance stats for (a) 5 assets classes (i.e., benchmark returns) (b) performance stats for Trend following approach, (c) performance stats for Risk Parity approach and (d) Risk Parity with trend following. Additional details are on the table itself along with my annotations.
This paper has additional concepts and tables. Covering them will require couple more posts. If you cannot wait then following is the link to the journal paper.
Risk Parity Approach
The paper assigns portfolio weights proportional to the inverse of observed volatility. In other words, at the end of each month we calculate the volatility of the asset over last one year and inverse of that is the portfolio weight for that asset for that month.
Trend Following Approach
Under this approach, buy an asset if the asset class price is above X-month moving average. Sell the asset, if price is below the X-month average and invest the proceeds in US 3-month Treasury bills. Signals are determined on end of month basis. No shorts. Only buys.
Finally, each asset class has an equal weight in the portfolio. That means if all 5 assets price is above X-month moving average, then each asset gets 20% of the portfolio weight. Instead, if only 3 assets has price above the moving average, then each of those 3 assets gets 20% of portfolio with rest in 3-month Treasury bills.
Momentum ApproachUnder this approach, at the end of each month all the asset classes are ranked based on their performance over last 12 months. Then buy the top quarter of the ranked assets and sell any assets in portfolio that are not in top quarter. Repeat this every month.
Another alternative is to buy the top half of the ranked assets and sell any assets that are not in top quarter. Finally each asset class has an equal weight in the portfolio.
The table provides performance stats for (a) 5 assets classes (i.e., benchmark returns) (b) performance stats for Trend following approach, (c) performance stats for Risk Parity approach and (d) Risk Parity with trend following. Additional details are on the table itself along with my annotations.
This paper has additional concepts and tables. Covering them will require couple more posts. If you cannot wait then following is the link to the journal paper.
I came across an interesting Ted Talk. The talk (20 min) is about the Left and Right hemispheres of the brain and how our perception changes when one hemisphere of the brain shuts off. Jill Bolte got a research opportunity few brain
scientists would wish for: She had a massive stroke, and watched as her
brain functions -- motion, speech, self-awareness -- shut down one by
one.
It is really a rare coincidence i.e., Jill Bolte herself is a brain scientist, courageous enough to observe and understand her brain from inside out through the stroke and recuperated enough to spread what she observed when her left brain hemisphere shut on and off during the stroke that lasted for 4 hours.
"We turn to God for help when our foundations are shaking, only to learn that it is God who is shaking them. For difficulties are divine surgeries to make us better..."
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