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Percentile Channel Strategy Replication

February 16, 2015

Michael Kapler of the always excellent Systematic Investor blog has moved his publishing to GitHub to make it easier to post code. This has flown under the radar (even to me), and we are all grateful that he is back to publishing. He was able to reproduce the “Simple Tactical Asset Allocation with Percentile Channel Strategy” in his recent post here.

The table below compares the original strategy (channel rp) to other benchmarks including 1)ew- equal weight the assets in the portfolio 2)rp- risk parity using the assets in the portfolio and 3) channel ew: the percentile channel TAA strategy using equal weighting 4) QATAA- which is the application of Mebane Faber’s trend-following strategy cited in his now famous paper- A Quantitative Approach to Tactical Asset Allocation (in this case QATAA uses the same underlying assets and cash allocation as the percentile TAA strategy). Of course QATAA is one of the inspirations for the strategy framework and Meb always manages to publish interesting ideas on his World Beta blog. To avoid issues with different sources of extended data, Systematic Investor begins the test in 2010 using the underlying ETF data to show how the strategies have performed in the current bull market. If you are getting results in line with this test than you can feel comfortable that you have the details correct- if not you can use R and the code provided by Systematic Investor in the post.

channel strategy replication

After comparing results, Michael and I show an near identical match (I also get a sharpe of 1.42 and a CAGR of 8.93%) – a relief after all the commotion caused by the initial post (which was addressed in my now amusing rant over here). The original strategy is the best performer of the bunch since it applies multiple time frames as well as normalized bet sizing via risk parity (common for most trend-followers). As I have stated before, of the reasons I like the Percentile Channel approach is that the signals are likely to be slightly different from what most asset managers and investors are using.

3 Comments leave one →
  1. February 18, 2015 12:28 am

    I’m getting a major discrepancy in 2011 despite using Yahoo data. But as Mike Kapler has replicated it, and he’s a fairly experienced individual, and it’s in line with your results, I have to take a closer look at what the heck is going on–whether it’s a data issue, or a methodology issue. It’s quite irritating, actually. Also, he has a runQuantile function. I wonder where he’s getting it from, because even if the way his scripts are compiled look highly irregular compared to how I code, if he has some helpful functions in that library of his, I want at them.

  2. GeraldM permalink
    February 18, 2015 8:31 am

    Hi David, Just dropping in to say thank you for your excellent work. I have been following you, Michael and Ilya for the last half-year or so. It is really fascinating stuff and I am astonished at both the quality and availability of the work; Ideas, verification, coding, more ideas – amazing! Sincere thanks to you (and Michael and Ilya) for these efforts!

    • david varadi permalink*
      February 20, 2015 1:37 am

      hi Gerald, thank you very much- glad to have some fans like yourself and also glad to have people like Michael and Ilya to publish code related to my ideas. I will try to keep it coming.

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