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Decoding stock market with quant alphas

Author

Listed:
  • Zura Kakushadze

    (Quantigic® Solutions LLC
    Free University of Tbilisi)

  • Willie Yu

    (Duke-NUS Medical School)

Abstract

We give an explicit algorithm and source code for extracting expected returns for stocks from expected returns for alphas. Our algorithm altogether bypasses combining alphas with weights into “alpha combos.” Simply put, we have developed a new method for trading alphas which does not involve combining them. This yields substantial cost savings as alpha combos cost hedge funds around 3% of the P&L, while alphas themselves cost around 10%. Also, the extra layer of alpha combos, which our new method avoids, adds noise and suboptimality. We also arrive at our algorithm independently by explicitly constructing alpha risk models based on position data [This is the last paper in the trilogy, which contains “Factor Models for Alpha Streams” (Kakushadze in J Invest Strateg 4(1): 83–109, 2014) and “How to Combine a Billion Alphas” (Kakushadze and Yu in J Asset Manag 18(1): 1–49, 2017a)]. Forecasting stock returns with quant alphas has implications for the investment industry.

Suggested Citation

  • Zura Kakushadze & Willie Yu, 2018. "Decoding stock market with quant alphas," Journal of Asset Management, Palgrave Macmillan, vol. 19(1), pages 38-48, January.
    • Handle: RePEc:pal:assmgt:v:19:y:2018:i:1:d:10.1057_s41260-017-0059-2
    DOI: 10.1057/s41260-017-0059-2
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    References listed on IDEAS

    as
    1. Zura Kakushadze & Willie Yu, 2017. "How to combine a billion alphas," Journal of Asset Management, Palgrave Macmillan, vol. 18(1), pages 64-80, January.
    2. Zura Kakushadze & Willie Yu, 2016. "Statistical Risk Models," Papers 1602.08070, arXiv.org, revised Jan 2017.
    3. Zura Kakushadze, 2014. "Factor Models for Alpha Streams," Papers 1406.3396, arXiv.org, revised Oct 2014.
    4. Zura Kakushadze, 2015. "Heterotic Risk Models," Papers 1508.04883, arXiv.org, revised Jan 2016.
    5. Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
    Full references (including those not matched with items on IDEAS)

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