Michael Isichenko - Quantitative Portfolio Management

1 Cover

2 Title Page Quantitative Portfolio Management The art and science of statistical arbitrage Michael Isichenko

3 Copyright

4 List of Figures

5 Code Listings

6 Preface

7 About this Book

8 Abstract

9 Acknowledgments

10 Introduction

11 Chapter 1: Market Data 1.1 Tick and bar data 1.2 Corporate actions and adjustment factor 1.3 Linear vs log returns

12 Chapter 2: Forecasting 2.1 Data for forecasts 2.2 Technical forecasts 2.3 Basic concepts of statistical learning 2.4 Machine learning 2.5 Dynamical modeling 2.6 Alternative reality 2.7 Timeliness-significance tradeoff 2.8 Grouping 2.9 Conditioning 2.10 Pairwise predictors 2.11 Forecast for securities from their linear combinations 2.12 Forecast research vs simulation

13 Chapter 3: Forecast Combining 3.1 Correlation and diversification 3.2 Portfolio combining 3.3 Mean-variance combination of forecasts 3.4 Combining features vs combining forecasts 3.5 Dimensionality reduction 3.6 Synthetic security view 3.7 Collaborative filtering 3.8 Alpha pool management

14 Chapter 4: Risk 4.1 Value at risk and expected shortfall 4.2 Factor models 4.3 Types of risk factors 4.4 Return and risk decomposition 4.5 Weighted PCA 4.6 PCA transformation 4.7 Crowding and liquidation 4.8 Liquidity risk and short squeeze 4.9 Forecast uncertainty and alpha risk

15 Chapter 5: Trading Costs and Market Elasticity 5.1 Slippage 5.2 Impact 5.3 Cost of carry 5.4 Market-wide impact and elasticity

16 Chapter 6: Portfolio Construction 6.1 Hedged allocation 6.2 Forecast from rule-based strategy 6.3 Single-period vs multi-period mean-variance utility 6.4 Single-name multi-period optimization 6.5 Multi-period portfolio optimization 6.6 Portfolio capacity 6.7 Portfolio optimization with forecast revision 6.8 Portfolio optimization with forecast uncertainty 6.9 Kelly criterion and optimal leverage 6.10 Intraday optimization and execution

17 Chapter 7: Simulation 7.1 Simulation vs production 7.2 Simulation and overfitting 7.3 Research and simulation efficiency 7.4 Paper trading 7.5 Bugs

18 Afterword: Economic and Social Aspects of Quant Trading

19 Appendix A1 Secmaster mappings A2 Woodbury matrix identities A3 Toeplitz matrix

20 Index

21 Question Index

22 Quotes Index

23 Stories Index

24 End User License Agreement

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2 Table of Contents

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Michael Isichenko

Copyright © 2021 by Michael Isichenko. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.