What happens after stocks suffer large one-day losses? This post finds that the proverbial “dead cat bounce” occurs overnight and is followed by continued losses the next day. Targeting international markets, I explore a trading strategy that aims to profit from the losses that follow a dead cat bounce.

The timing of the dead cat bounce

Most traders are familiar with the “dead cat bounce”: a temporary price recovery following losses, that is followed by more losses. But when does the bounce occur and when do the losses resume?

Using end-of-day price data for US stocks, I identify all stocks that suffered one-day losses of -10% or…


What is survivorship bias, and why should you care about it? This post explains how survivorship bias can trick you into drawing faulty conclusions from your research, and what you need to know to avoid being tricked.

What is survivorship bias?

Equities datasets are said to have survivorship bias if they do not include stocks that delisted in the past due to bankrupties, mergers and acquisitions, or other events. Such datasets only include historical data for stocks that are still actively trading, that is, for the companies that have survived to the present day, hence the name “survivorship bias.”

In contrast, datasets that include…


Quantopian announced that it is shutting down its community platform. This doesn’t entirely come as a surprise.

Quantopian returned money to investors earlier this year after its investment strategy underperformed. It shut down paper trading in 2019 (having already ended live trading in 2017), then terminated its daily contests in May of this year. Since that time, Quantopian’s website has billed itself simply as a free educational site where anyone can “become an expert in quant finance,” with no suggestion of a business model other than a sidebar link to Quantopian Enterprise, Quantopian’s commercial offering through FactSet. Meanwhile, numerous employees…


What happens when strong stocks gap down at the open? A well-known trading strategy is to buy the gap, expecting mean reversion. This post uses Zipline to explore down gaps and finds a profitable strategy based on selling, not buying, the gap.

Buy the gap?

Buying stocks that gap down is a common trading strategy. The reasoning behind the strategy is that bad news causes traders to enter sell orders overnight which execute in tandem at the open, causing a temporary liquidity shock which drives down the opening price. The selling pressure immediately exhausts itself, however, leading the stock to recover through the…


Intraday trading strategies offer great promise as well as great peril. This post explores an intraday trading strategy for crude oil calendar spreads and highlights the impact of transaction costs on its profitability.

Background

In a previous post, I explored an end-of-day pairs trading strategy in which the chief difficulty was to find suitable pairs. Pairs that cointegrate in-sample often cease to cointegrate out-of-sample.

Futures calendar spreads present an intriguing alternative to equity pairs because futures contracts for the same underlying are closely related to each other and thus seem unlikely to wander apart. …


Classic pairs trading strategies have suffered deteriorating returns over time. Can a research pipeline that facilitates the identification and selection of ETF pairs make pairs trading viable again? This post investigates such a pipeline.

The problem: pairs wander away

Source: Ernie Chan, Algorithmic Trading: Winning Strategies and Their Rationale, Wiley, May 28, 2013, chapter 4.

Pairs trading is a classic arbitrage strategy on securities in the same industry (for example, Coke and Pepsi) in which the trader buys one security and sells the other when the spread between them widens, then closes the positions when the spread narrows again.

In his book Algorithmic Trading, Ernie…


Do intraday strategies have a place in the portfolios of long-term investors and fund managers? This post explores an intraday strategy that works best in high volatility regimes and thus makes an attractive candidate for hedging long-term portfolio risk.

Trading hypothesis: first half hour predicts last half hour

Source paper: Gao, Lei and Han, Yufeng and Li, Sophia Zhengzi and Zhou, Guofu, Intraday Momentum: The First Half-Hour Return Predicts the Last Half-Hour Return (June 28, 2015). Available at SSRN: https://ssrn.com/abstract=2552752

The authors of the above paper contend that when the S&P 500 is positive during the first half hour (prior close to 10:00 AM) as well as the penultimate…


Does forced buying and selling of underlying shares by leveraged ETF sponsors cause predictable intraday price moves? This post explores an intraday momentum strategy based on the premise that it does.

Daily rebalancing of leveraged ETFs

Source: Ernie Chan, Algorithmic Trading: Winning Strategies and Their Rationale, Wiley, May 28, 2013, chapter 7.

Per their fund objectives, leveraged ETFs must maintain a constant daily leverage relative to their underlying index (usually 2x or 3x leverage). As Ernie Chan points out in his book Algorithmic Trading, doing so requires that the ETF sponsors buy more underlying shares on days the shares go up and sell shares on…


Do businesses exchange currencies in predictable ways that forex traders can exploit? This post explores an intraday EUR.USD strategy based on the hypothesis that businesses cause currencies to depreciate during local business hours and appreciate during foreign business hours.

Business patterns in foreign exchange

Source paper: Breedon, Francis and Ranaldo, Angelo, Intraday Patterns in FX Returns and Order Flow (April 3, 2012). Queen Mary, University of London, School of Economics and Finance WP 694. Available at SSRN: https://ssrn.com/abstract=2099321

Academic research shows that currencies tend to depreciate during local business hours and appreciate during foreign business hours. Researchers postulate that businesses are net buyers of foreign…


If you’re a short seller exploring global markets, a good first question to ask is: are there shares available to borrow? This post looks at the percentage of stocks that are shortable through Interactive Brokers in each of 17 countries.

Data source

Interactive Brokers provides an FTP site with a list of all shortable stocks and the number of shortable shares available for each, organized by country. The list is updated every 15 minutes throughout the day. QuantRocket maintains a historical archive of the data going back to April 2018.

Methodology

I compare the number of stocks that were shortable in the previous…

QuantRocket

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