Cuffing Season

Introduction Prerequisites What Are the Questions? Organization Acknowledgments The Map and the Territory The Securities Modes of Exchange Who Are the Market Participants? The Sell Side The Buy Side Where Do Excess Returns Come From? The Elements of Quantitative Investing Returns: Properties and Models Returns Definitions Excess Returns Log Returns Estimating Prices and Returns Stylized Facts Conditional Heteroscedastic Models (CHM) GARCH(1, 1) and Return Stylized Facts GARCH as random recursive equations GARCH(1, 1) Estimation Realized Volatility Combining CHM and Realized Volatility State-Space Estimation of Variance Muth's Original Model: EWMA The Harvey-Shephard Model Appendix The Kalman Filter Kalman Filter Examples Exercises Linear Models of Returns Factor Models Interpretations of Factor Models Graphical Model Superposition of Effects Single-Asset Product Alpha Spanned and Alpha Orthogonal Transformations Rotations Projections Push-Outs Applications Performance Attribution Risk Management: Forecast and Decomposition Portfolio Management Alpha Research Factor Models Types Appendix Linear Regression Linear Regression Decomposition The Frisch-Waugh-Lovell Theorem The Singular Value Decomposition Exercises Evaluating Excess Returns Backtesting Best Practices The Backtesting Protocol Cross-Validation and Walk Forward The Rademacher Anti-Serum Setup Main result and Interpretation Appendix Proofs for RAS Evaluating Risk Evaluating The Covariance Matrix Robust Loss Functions for Volatility Estimation Application to Multivariate Returns Evaluating the Precision Matrix Minimum-Variance Portfolios Mahalanobis Distance Ancillary Tests Model Turnover Testing Betas Coefficient of Determination? Fundamental Factor Models The Inputs and the Process The Inputs The Process Cross-Sectional Regression Rank-Deficient Loadings Matrices Conditions for Constrained Identification Estimating The Factor Covariance Matrix Factor Covariance Matrix Shrinkage Dynamic Conditional Correlation Short-Term Factor Updating Correcting for Autocorrelation in Factor Returns Estimating the Idiosyncratic Covariance Matrix Bootstrapping the Idiosyncratic Covariance Matrix Exponential Weighting Visual Inspection Short-Term Idio Update Off-Diagonal Clustering Idiosyncratic Covariance Matrix Shrinkage Winsorization of Returns Selecting Factors: the Large Number of Predictor Case Advanced Model Topics Linking Models Currency Rebasing A Tour of Factors Further Reading Statistical Factor Models Statistical Models: The Basics Best Low-Rank Approximation and PCA Maximum Likelihood Estimation and PCA Cross-Sectional and Time-Series Regressions via SVD Beyond the Basics The Spiked Covariance Model Spectral Limit Behavior of the Spiked Covariance Model Optimal Shrinkage of Eigenvalues Eigenvalues: Experiments Vs. Theory Choosing the Number of Factors Real-Life Stylized Behavior of PCA Concentration of Eigenvalues Controlling the Turnover of Eigenvectors Interpreting Principal Components The Clustering View The Regression View Statistical Model Estimation in Practice Weighted and Two-Stage PCA Implementing Statistical Models in Production Further Reading Exercises Portfolio Management: The Basics Why Mean-Variance Optimization? Mean-Variance Optimal Portfolios Trading in Factor Space Factor-Mimicking Portfolios Adding, Estimating, and Trading a New Factor Factor Portfolios from Sorts Trading in Idio Space Drivers of Information Ratio: Information Coefficient and Diversification Investment Performance Metrics Expected Return Volatility Sharpe Ratio Capacity Appendix Convex Optimization Duality Local Analysis Solutions to Specific Optimization Problems Optimality of FMPs Single-Factor Covariance Matrix Updating Beyond Simple Mean-Variance Shortcomings of Naïve MVO Constraints and Modified Objectives Types of Constraints Do Constraints Improve or Worsen Performance? Constraints as Penalties How Does Estimation Error Affect Sharpe Ratio? The Impact of Alpha Error The Impact of Risk Error Trading Sharpe For Capacity Appendix Theorems on Sharpe Efficiency Loss Market-Impact-Aware Portfolio Management Market Impact Temporary Market Impact Multiperiod Optimization Baldacci-Benveniste-Ritter Comparison to Single-Period Optimization The No-Market-Impact Limit Optimal Liquidation Deterministic Alpha AR(1) Signal Mixing Signals Essential Statistics for AR(1) Processes Further Reading Hedging Toy Story Factor Hedging The General Case Hedging Tradable Factors with Time-Series Betas Factor-Mimicking Portfolios of Time Series Appendix Dynamic Risk Allocation The Kelly Criterion Mathematical properties The Fractional Kelly Strategy Fractional Kelly and Drawdown Control Ex Post Performance Attribution Performance Attribution: The Basics Performance Attribution with Errors Two Paradoxes Estimating Attribution Errors Paradox Resolution Maximal Performance Attribution Selection vs. Sizing Attribution Connection to the Fundamental Law of Active Management Long-Short Performance Attribution Appendix Proof of the Selection vs. Sizing Decomposition Index Index