Trading Flashcards
What is the objective of Trading
Timing the market in the short run. Identify small inefficiencies and explore them.
What is the Adaptive Market Hypothesis?
Every explorable opportunity will fade away as more investors explore it.
Name the three different contrasts in Trading Styles
Opportunistic (trading specific events) x Systematic (works over time)
Subjective x Quantitative
Technical x Fundamental
Explain Technical Analysis
Exploring patters by assuming weak EMH
Name known types of technical analysis
TF, MR, Supports and Resistances…
Explain Fundamental Analysis
Assessing real asset values through more data than prices. (Using macro and accounting data)
Name Value factors
Price-to-earnings
Dividend Yield
EV/EBITDA
ROE
Name Growth factos
PE growth
Price/Sales
Asset Growth
Name Macro factors
CPI
GDP
Unemployment
Budget Deficit
To replicate an index you can:
- Replicate manually (buy all companies in the index)
- Buy an ETF that tracks it (subject to tracking error and operating expenses)
- Buy futures (pay an interest rate and receive a dividend yield)
How do Hedge Funds invest in Futures
They pay the margin and invest the rest at the rf rate.
Example: Asset costs 225k, margin is 10k, so they pay the margin and put the rest on the rf.
Need scalability, not available to retailers.
Explain January Effect: What is it? Why does it happen? How can we take advantage?
January returns tend to be higher than other months.
Possible explanation is: investors sell losing positions in December to obtain a tax discount; Window dressing.
Should go long from the end of December until the end of January.
Explain Day-of-the-week Effect: What is it? Why does it happen? How can we take advantage?
On Mondays returns tend to be lower.
Explanation: Investor sentiment, data announcements.
Short on Mondays. Use as filter for other strategies.
Explain End-of-Month Effect: What is it? Why does it happen? How can we take advantage?
Last 4 days and first 3 contain most of a months returns.
Explanation: Salaries and pensions result in inflows, window dressing.
Go long 3/4 days before month ends and exit 7 days later.
Explain Holiday Effect: What is it? Why does it happen? How can we take advantage?
Returns are higher after a holiday.
Explanation: Catching up after lost days.
Go long before holiday and exit after it is finished.
Explain Time-of-day Effect: What is it? Why does it happen? How can we take advantage?
Most returns are generated over night.
Day traders go home squared.
Go long overnight, specially if the market closed downward.
Explain Christmas Rally Effect: What is it? Why does it happen? How can we take advantage?
Returns are higher during holiday season.
Explanation: multiple holidays, end-of-month, end-of-year
Long mid-December and exit early January.
Explain Sell in May and Go Away Effect: What is it? Why does it happen? How can we take advantage?
Most returns are concentrated in October-April.
Explanation: Earnings/Dividends periods.
Go long in October and exit in April.
Explain Momentum Effect: What is it? Why does it happen? How can we take advantage?
Past winners outperform past losers (3-6 months)
Explanation: Slow diffusion of information, herd behavior.
Buy winners and short losers; deciles (hold top 10 winners)
Why are interest rates bad for firms?
Slow the economy
Decrease terminal values
Compare interbank rates to central bank rates:
Interbank rates are higher since they bear higher risk of default
Why do CBs change rates?
Provide or take away liquidity from the market.
Is the Yield Curve slope an effective predictor of stock returns?
Yes.
If yield curve steepens, what happens to equities?
Forward rates rise, so equities fall (Think future CFs discounted at higher rates, at least higher than the near future)
Low-Sharpe combination can lead to good sharpe?
Yes, diversification
Name stuggles of working with fundamental data
Meaningfulness, reliability, comparability, timeliness
What are the most used equity factors?
Market (Betas)
Value (High-minus-Low)
Size (SMB)
Momentum
Volatility
Quality
Problem with using Macro factors?
Frequently lagging, when they go public, are already discounted
Mixing Factors, how should you proceed?
NO joining ranks (rank + rank)
Filter for factor and then rank (remember assignment)
Combining different strategies better than joining (not as good as filtering) (rank or rank)
Take into consideration when using factors for equities:
Different factors for different industries.
Banks: Price to Book (assets)
Tech: Price to Sales Growth
Industrials: EV/EBITDA
Capital Intensive: FCF
Volatility factor to generate signal to buy/sell equity?
Volatility smile skewness
Other techniques to take advantage of factors?
Factor analysis / PCA to generate own factors
Machine Learning to select most relevant factors
Surprise factors (Expected vs. Actual) - Earnings beat
Issues to look for in a trading strategy (fundamentals):
Announcement dates (forward looking bias)
Accounting standards
Adjust for corporate events
Periodicity of events
Window dressing
Index Changes (survivorship bias)
How can we improve fundamental data backtesting?
Using specific industries
