Really, Beware Of Depression Frequency Data

I wrote inwards a previous article about why nosotros should backtest fifty-fifty end-of-day (daily) strategies amongst intraday quote data. Otherwise, the functioning of such strategies tin dismiss hold upward inflated. Here is some other vivid instance that I came across recently.

Consider the stone oil futures ETF USO together with its evil twin, the inverse stone oil futures ETF DNO*. In theory, if USO has a daily return of x%, DNO volition lead maintain a daily supply of -x%. In practice, if nosotros plot the daily returns of DNO against that of USO from 2010/9/27-2016/9/9, using the commons consolidated end-of-day information that yous tin dismiss detect on Yahoo! Finance or whatever other vendor,

nosotros meet that though the gradient is indeed -1 (to inside a touchstone fault of 0.004), in that location are many days amongst pregnant divergence from the direct line. The trader inwards us volition right away retrieve "arbitrage opportunities!"

Indeed, if nosotros backtest a uncomplicated hateful reversion strategy on this couplet - simply purchase equal dollar amount of USO together with DNO when the amount of their daily returns is less than forty bps at the marketplace close, concur 1 day, together with vice versa - nosotros volition detect a strategy amongst a decent Sharpe ratio of 1 fifty-fifty afterwards deducting v bps per side every bit transaction costs. Here is the equity curve:

Looks reasonable, doesn't it? However, if nosotros backtest this strategy 1 time again amongst BBO information at the marketplace close, taking assist to subtract one-half the bid-ask spread every bit transaction cost, nosotros detect this equity curve:

We tin dismiss meet that the occupation is non exclusively that nosotros lose coin on practically every trade, but that in that location was seldom whatever merchandise triggered. When the daily EOD information suggests a merchandise should hold upward triggered, the 1-min bar BBO information tells us that inwards fact in that location was no divergence from the mean.

(By the way, the returns inwards a higher house were calculated earlier nosotros fifty-fifty deduct the borrow costs of occasionally shorting these ETFs. The "rebate rate" for USO is nearly 1% per annum on Interactive Brokers, but a steep 5.6% for DNO.)

In instance yous retrieve this occupation is peculiar to USO vs DNO, yous tin dismiss travail TBT vs UBT every bit well.

Incidentally, nosotros lead maintain simply verified a golden dominion of fiscal markets: apparent divergence from efficient marketplace is allowed when no 1 tin dismiss profitably merchandise on the arbitrage opportunity.

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*Note: according to www.etf.com, "The issuer [of DNO] has temporarily suspended creations for this fund every bit of Mar 22, 2016 pending the filing of novel paperwork amongst the SEC. This activity could do odd or excessive premiums— an growth of the marketplace cost of the fund relative to its fair value. Redemptions are non affected. Trade amongst care; cheque iNAV vs. price." For an explanation of "creation" of ETF units, meet my article "Things You Don't Want to Know nearly ETFs together with ETNs".

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Industry Update

• Quantiacs.com simply lately registered every bit a CTA together with operates a marketplace for trading algorithms that anyone tin dismiss contribute. They besides published an educational spider web log post for Python together with Matlab backtesters: https://quantiacs.com/Blog/Intro-to-Algorithmic-Trading-with-Heikin-Ashi.aspx

• I volition hold upward moderating a panel give-and-take on "How tin dismiss funds leverage non-traditional information sources to displace investment returns?" at Quant World Canada inwards Toronto, Nov 10, 2016. 

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Upcoming Workshops

• October 22 together with 29, Saturdays, Quantitative Momentum Strategies online workshops. 

Momentum strategies are for those who desire to benefit from tail events. I volition hash out the substitution reasons for the beingness of momentum inwards diverse markets, every bit good every bit specific momentum strategies that concur positions from hours to days.

H5N1 senior managing director at a major depository fiscal establishment wrote me: "…thank yous 1 time again for the Momentum Strategies preparation course of report this week. It was real beneficial. I constitute your explanations of the concepts real clear together with the examples good developed. I similar the rigorous approach that yous lead maintain to strategy evaluation.”