Justina’s Quant Newsletter: September 2023

Since my last edition, I’ve published my Businessweek story on stock-market skewness. I interviewed Hendrik Bessembinder, who wrote what I consider the academic finance paper of the FAANG era, about how the majority of US stocks don’t even outperform the T-bill and the market goes up mainly because of a small fraction of big winners (72 companies have accounted for half of all net wealth creation from stocks over T-bills since 1926 etc). To be clear, the results are so extreme because 1) these are super long-term outcome and the distribution of stock performance gets more skewed with time 2) his paper covered the entire US market, not just large-caps.

But this skewness has been especially apparent even just YTD. JPM says the 20 largest stocks are contributing most to SPX returns in more than 20 years.

Bessembinder’s point in his latest paper is this is why over long horizons a dwindling percentage of active managers beat their benchmarks, but some of them beat them by a lot:

Frequency Distribution of Lifetime Mutual Funds Return

There might also be an industry effect. We cited another study that showed tech is more skewed than other sectors, which might be why the SPX is more skewed than other large-cap benchmarks.

Bessembinder’s updated version of his shareholder wealth creation paper shows stock market gains have become more concentrated in recent years, which also jibes with this theory that a tech-driven economy is more winner-takes-all.

Apart from that I also wrote about the start of SX5E 0DTE options in Europe.

If anyone you know would like to subscribe, they can fill in their email here or email/DM me. If you’d like to unsubscribe, please let me know. I promise I will honor it with no sad reply.

Feedback is always welcome, and if there’s anything exciting in quant space I’ve missed that you think hasn’t been covered, please do let me know!

Thank you for reading and enjoy the weekend!



  1. Tom Wolfe and the Birth of the Quant Revolution: Aaron Brown (Bbg)
  2. Eisler loses another PM to reborn JPMorgan London hedge fund (efinancialcareers)
  3. Castle Ridge unveils one-of-a-kind AI supercomputer, WALLACE (press release)
  4. ExodusPoint Hires Engineers Gate’s Lapsa to Run Quant Investing (Bbg)
  5. AQR Capital Bucks Industry Woes With Value Fueling 9% Fund Gains (Bbg)
  6. Sushil Wadhwani to step back from eponymous firm (FT)
  7. Man Numeric Aims to Go 100% Electronic for Credit Trades By 2025 (Bbg)
  8. Corzine’s Foes Seek to Cut Off His Futures Trading Abilities (Bbg)
  9. China Quant Founder Buys $39 Million Shanghai Villa in Auction (Bbg)
  10. Citadel Vets 69,000 Intern Applicants to Find Next Math Geniuses (Bbg)
  11. Two Sigma China Fund Surges in July as Quant Firm Taps Investors (Bbg)
  12. Ex-DRW Trader Accused of Stealing Proprietary Quant Code (Bbg)
  13. WorldQuant Chief Sees AI Triggering Asset-Management Shakeup (Bbg)
  14. Schonfeld, Balyasny, ExodusPoint Lag as Multi-Strats Falter (Bbg)


Industry research:

  1. Elm Partners: A Closer Look at ‘Cut Your Losses Early; Let Your Profits Run’
  2. Andrew Beer in II: Why Managed Futures Funds Are Ripe for Replication
  3. GS: A conversation with Renaissance Technologies CEO Peter Brown (!)
  4. Man: How can trend-following’s “crisis alpha” credentials be monetised when there’s no crisis?
  5. AlphaSimplex: Crisis or Correction: Managing Expectations for Managed Futures and Crisis Alpha


Academic research:
Equity cross-section/asset pricing:

  1. Echo Effect in Cross-Sectional Momentum: Empirical Tests
  2. Mispricing and Anomalies: An Exogenous Shock to Short Selling from Jgtrra
  3. Anomalies, Roll’s Critique, and Proxy Error
  4. Do Anomalies Really Predict Market Returns? New Data and New Evidence
  5. Mark-to-market or Mark-to-sentiment – The Sensitivity of Fair Value Measurement to Investor Sentiment
  6. Mind the Gap: The Market Price of Financial Flexibility
  7. Power Sorting
  8. You Have a Point – But a Point Is Not Enough: The Case for Distributional Forecasts of Earnings
  9. Information Transparency and Stock Sentiment Beta
  10. Realized Semibetas and International Stock Return Predictability
  11. Predicting Financial Market Trends using Time Series Analysis and Natural Language Processing
  12. Option Implied Dividends and the Market Risk Premium
  13. Do Household Investors Intensify Momentum Returns?
  14. E-Commerce Live Streaming Data and Future Stock Returns
  15. The CAPM, APT, and PAPM
  16. Common Firm-level Investor Fears: Evidence from Equity Options
  17. Hedge Funds, Short Sales, and the 52-Week High
  18. Inflation-Induced Overearnings
  19. Tradable Factor Risk Premia and Oracle Tests of Asset Pricing Models
  20. Business Models, Cash Conversion Cycles, and Stock Returns
  21. Predictability of Analyst Earnings Forecast Errors and Institutional and Individual Investors’ Reactions to Earnings News

Execution/market structure/market making:

  1. How Free is Free? Retail Trading Costs with Zero Commissions
  2. Social Media and the Stock Market: Trading, Price Efficiency, and Liquidity
  3. Where is the Value in High Frequency Trading?
  4. Optimal Trade Execution Strategy and Implementation with Deterministic Market Impact Parameters
  5. Identifying High Frequency Trading Activity without Proprietary Data
  6. New general dependence measures: construction, estimation and application to high-frequency stock returns
  7. Information Content of Cross-Sectional and Multilevel Order Flow Imbalances: A Bayesian Approach
  8. Does High-Frequency Trading Cause Stock Prices to Deviate from Fundamental Values?
  9. A Market Maker of Two Markets: The Role of Options in ETF Arbitrage
  10. Retail Trading: An Analysis of Current Trends and Drivers
  11. Aggregation of financial markets
  12. Improved Block Rearrangement Algorithm

Trading strategy:

  1. Cut Your Losses and Let Your Profits Run


  1. Bond futures: Delivery Option with Term Structure Modelling
  2. Price Formation in the Foreign Exchange Market
  3. Financial Market Inflation Perceptions
  4. Default Clustering Risk Premium and its Cross-Market Asset Pricing Implications
  5. Reintroducing the New York Fed Staff Nowcast
  6. Modeling liquidity in corporate bond markets: applications to price adjustments
  7. A Research-based Approach to Fixed Income Factor Portfolio Implementation
  8. Inflation Hedging: A Dynamic Approach Using Online Prices
  9. The Effectiveness of Ex Ante Real Earnings Yields in Forecasting Stock Market Returns

Asset allocation/portfolio construction:

  1. TailCoR
  2. Underperformance of Concentrated Stock Positions
  3. Formulations to Select Assets for Constructing Sparse Index Tracking Portfolios
  4. Signature Trading: A Path-Dependent Extension of the Mean-Variance Framework with Exogenous Signals
  5. Regression, Multicollinearity and Markowitz
  6. SCOP: Schrodinger Control Optimal Planning for Goal-Based Wealth Management (Fidelity’s Igor Halperin)
  7. Long-Term Mean-Variance Optimization Under Mean-Reverting Equity Returns
  8. A monotone numerical integration method for mean-variance portfolio optimization under jump-diffusion models
  9. How Optimal Are Risk-Based Portfolios?
  10. Portfolio Construction When Regimes Are Ambiguous


  1. Testing and Forecasting Price Jumps with Return Moments
  2. Do Variance Expectations Overreact? Evidence From the Cross-section of Stock Options
  3. The Cost of Vega-Hedging Structured Products (BNP)
  4. Neural Tangent Kernel in Implied Volatility Forecasting: A Nonlinear Functional Autoregression Approach
  5. Volatility-Related Exchange Traded Assets: An Econometric Investigation
  6. BUMVU Estimators
  7. Instabilities of Super-Time-Stepping Methods on the Heston Stochastic Volatility Model
  8. On the implied volatility of European and Asian call options under the stochastic volatility Bachelier model
  9. Joint Calibration of Local Volatility Models with Stochastic Interest Rates using Semimartingale Optimal Transport
  10. Portfolios Generated by Contingent Claim Functions, with Applications to Option Pricing
  11. Duration Dependent Volatility Models with Value-weighted Approach
  12. Option Prices, Implied Variance and Linear Interpolation
  13. Enhancing Volatility Forecasting: A Dual Empirical Mode Decomposition Approach
  14. The Price of Macroeconomic Uncertainty: Evidence from Daily Options
  15. Weak Markovian Approximations of Rough Heston
  16. Gamma Hedging and Rough Paths
  17. Geometry of vectorial martingale optimal transport and robust option pricing
  18. News-driven Expectations and Volatility Clustering
  19. Regret-Optimal Federated Transfer Learning for Kernel Regression with Applications in American Option Pricing
  20. Tail Risk Hedging: The Search for Cheap Options
  21. Modelling Time-Varying Volatility Interactions

Machine learning/AI:

  1. Comparing Deep RL and Traditional Financial Portfolio Methods
  2. Predicting Style Factor Returns and Group/sector Returns Using Long and Short-term Memory (‘LSTM’) Deep Learning Neural Networks
  3. Predicting Returns with Machine Learning Across Horizons, Firms Size, and Time
  4. Deep Learning for Derivatives Pricing: A Comparative Study of Asymptotic and Quasi-process Corrections
  5. Diffusion Variational Autoencoder for Tackling Stochasticity in Multi-Step Regression Stock Price Prediction
  6. Linking microblogging sentiments to stock price movement: An application of GPT-4
  7. Hedging Forecast Combinations With an Application to the Random Forest
  8. Breaking the Bank with ChatGPT: Few-Shot Text Classification for Finance
  9. Deep multi-step mixed algorithm for high dimensional non-linear PDEs and associated BSDEs
  10. GPT-InvestAR: Enhancing Stock Investment Strategies through Annual Report Analysis with Large Language Models
  11. GPT’s Idea of Stock Factors
  12. Learning Deep News Sentiment Representations for Macro Finance
  13. Econometrics of Machine Learning Methods in Economic Forecasting
  14. Hedging Barrier Options Using Reinforcement Learning
  15. Fourier Neural Network Approximation of Transition Densities in Finance
  16. Machine Learning Applied to Active Fixed-income Portfolio Management: A Lasso Logit Approach
  17. Applying Reinforcement Learning to Option Pricing and Hedging
  18. Bi-objective Cost-sensitive Machine Learning: Predicting Stock Return Direction Using Option Prices
  19. Applying Deep Learning to Calibrate Stochastic Volatility Models
  20. Market-GAN: Adding Control to Financial Market Data Generation with Semantic Context
  21. Media Moments and Corporate Connections: A Deep Learning Approach to Stock Movement Classification
  22. A compendium of data sources for data science, machine learning, and artificial intelligence
  23. New News is Bad News
  24. Generating drawdown-realistic financial price paths using path signatures
  25. Risk Budgeting Portfolio Optimization with Deep Reinforcement Learning
  26. The Anatomy of Mortgage Default Using Shape-Constrained Explainable Machine Learning Model
  27. Nonlinear Relationships in Stock News Co-Occurrence: A Pairs Trading Test on the Constituent Stocks of the Csi 300 Index Based on Deep Reinforcement Learning Methods
  28. Factor Correlation and the Cross Section of Asset Returns: A Correlation-Robust Machine Learning Approach

Asset management:

  1. Portfolio Management in Private Equity
  2. Cross-Sectional Performance Persistence of Mutual Fund Managers
  3. Discretionary Investing by ‘Passive’ S&P 500 Funds


  1. Harnessing the Web and Knowledge Graphs for Automated Impact Investing Scoring
  2. News is Risky Business


Other Math I Don’t Understand:

  1. Using and Interpreting Fixed Effects Models
  2. High-Cardinality Categorical Covariates in Network Regressions
  3. The Potential of Quantum Techniques for Stock Price Prediction
  4. The Misuse of Regression-Based x-Scores as Dependent Variables
  5. Continuous Statistical Jump Models for Identifying Financial Regimes
  6. Monte Carlo Simulation for Trading Under a Lévy-Driven Mean-Reverting Framework
  7. Kelvin Waves, Klein-Kramers and Kolmogorov Equations, Path-Dependent Financial Instruments: Survey and New Results



  1. Beauty and stock market participation