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Quant Bust 2020

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  • Zura Kakushadze

Abstract

We explain in a nontechnical fashion why dollar-neutral quant trading strategies, such as equities Statistical Arbitrage, suffered substantial losses (drawdowns) during the COVID-19 market selloff. We discuss: (i) why these strategies work during "normal" times; (ii) the market regimes when they work best; and (iii) their limitations and the reasons for why they "break" during extreme market events. An accompanying appendix (with a link to freely accessible source code) includes backtests for various strategies, which put flesh on and illustrate the discussion in the main text.

Suggested Citation

  • Zura Kakushadze, 2020. "Quant Bust 2020," Papers 2006.05632, arXiv.org.
    • Handle: RePEc:arx:papers:2006.05632
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    File URL: http://arxiv.org/pdf/2006.05632
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    References listed on IDEAS

    as
    1. Zura Kakushadze, 2015. "Combining Alphas via Bounded Regression," Risks, MDPI, vol. 3(4), pages 1-17, November.
    2. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. "Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
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    5. Zura Kakushadze & Willie Yu, 2016. "Statistical Industry Classification," Journal of Risk & Control, Risk Market Journals, vol. 3(1), pages 17-65.
    6. Khandani, Amir E. & Lo, Andrew W., 2011. "What happened to the quants in August 2007? Evidence from factors and transactions data," Journal of Financial Markets, Elsevier, vol. 14(1), pages 1-46, February.
    7. Zura Kakushadze & Willie Yu, 2017. "How to combine a billion alphas," Journal of Asset Management, Palgrave Macmillan, vol. 18(1), pages 64-80, January.
    8. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May.
    9. Evan Gatev & William N. Goetzmann & K. Geert Rouwenhorst, 2006. "Pairs Trading: Performance of a Relative-Value Arbitrage Rule," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 797-827.
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    12. Zura Kakushadze, 2016. "Shrinkage=factor model," Journal of Asset Management, Palgrave Macmillan, vol. 17(2), pages 69-72, March.
    13. Zura Kakushadze & Willie Yu, 2019. "Machine Learning Risk Models," Papers 1903.06334, arXiv.org, revised Apr 2019.
    14. Zura Kakushadze & Willie Yu, 2017. "Open Source Fundamental Industry Classification," Papers 1706.04210, arXiv.org, revised Dec 2017.
    15. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-682, June.
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    17. Zura Kakushadze, 2015. "Combining Alphas via Bounded Regression," Papers 1501.05381, arXiv.org, revised Oct 2015.
    18. Jegadeesh, Narasimhan & Titman, Sheridan, 1995. "Overreaction, Delayed Reaction, and Contrarian Profits," The Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 973-993.
    19. Zura Kakushadze, 2014. "4-Factor Model for Overnight Returns," Papers 1410.5513, arXiv.org, revised Jun 2015.
    20. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. "Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
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    22. Zura Kakushadze & Willie Yu, 2019. "Machine Learning Risk Models," Journal of Risk & Control, Risk Market Journals, vol. 6(1), pages 37-64.
    23. Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
    24. Zura Kakushadze & Juan Andrés Serur, 2018. "151 Trading Strategies," Springer Books, Springer, number 978-3-030-02792-6, December.
    Full references (including those not matched with items on IDEAS)

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