Isolating Alpha in Trading Models — Transcript
Full transcript
- 0:00This is how all of the pieces of the
- 0:01puzzle fit together. We start from
- 0:03diversifiable undiversifiable risk. We
- 0:06take a look at what it looks like
- 0:07visually to compress to undiversifiable
- 0:09risk. And then we take a look at
- 0:11principal component analysis as an
- 0:13unsupervised means of corroborating that
- 0:16theory. Then we take a look at the
- 0:17capital asset pricing model and
- 0:19extensions, Fama-French, other factor
- 0:22models, factors, use whatever to try to
- 0:24proxy in a quantitative way for what we
- 0:26need to neutralize. We see that oh wow,
- 0:29if we run a market neutral strategy, it
- 0:31doesn't matter what the broader
- 0:32macroeconomy does so long as our model
- 0:34is correct.
- 0:36And then when we go about constructing
- 0:37that market neutral strategy here, I
- 0:39show you on Coke and Pepsi. In reality,
- 0:41we'd probably do a broader
- 0:42cross-sectional signal if you have
- 0:44significantly more data, whatever it is
- 0:45you're actually trying to run.
- 0:48You see the net effect. When the market
- 0:50is down, it doesn't matter so long as
- 0:52our model is correct and we've
- 0:53reasonably neutralized beta.
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