Robust Trend-Following Systems

What this episode covers

This episode based on J.P. Morgan's research paper develops a robust trend-following trading system. It proposes a trend-following signal based on statistical hypothesis testing, linking it theoretically to options strategies. The paper analyzes the signal's properties, including profit drivers and transaction costs, using both theoretical models (like AR(1) processes) and backtesting on various asset classes. Portfolio management strategies, such as risk budgeting and hierarchical risk parity, are explored to optimize performance and manage risk. Finally, the system's performance is compared to benchmarks, highlighting diversification benefits and robustness across different fee structures.

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