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Contrarian strategies: how to constitute a pfolio based on P/E & P/B
Martin Cattoir
edited Dec 5, 2013

Dear Quantopian community,

My name is Martin and I recently discovered this awesome website. I felt such a relief when I found out that there WAS a way to test investment strategies that easy.
In the context of a master thesis, I would like to test a contrarian strategy (inspired by Lakonishok, Shleifer and Vishny 1994). The strategy is the following:

for each sector i:

  1. Long the 10% lowest or first 10th decile of stocks from sector i ranked on a score averaging their P/E and P/B ratios
  2. Short the 10% higher or last 10th decile of stocks from sector i ranked on a score averaging their P/E and P/B ratios
  3. Reassess the composition of stocks every f weeks over the whole considered/available period (make sure that you still hold stocks from the top or bottom 10%/10-decile and make adjustments

The idea is to examine the influence of the sector i and the rebalancing frequence f on returns and risk-adjusted returns! Fun, isn't it.

My questions are:

  1. Suggestions on the strategy are more than welcome
  2. Is there a way to make the algorithm select stocks from a market by itself, instead of inputting it manually
  3. I am not familiar with python (more skilled in Java) and I know that this algorithm (https://www.quantopian.com/posts/trading-using-simple-p-slash-e-values-and-momentum) would help but I am not sure how to exactly use it... Any suggestions? (please?)

Thanks a lot,
Martin

1 response
Dan Dunn
Dec 6, 2013

That looks like a neat idea.

Writing that whole thing is bit more than I can bite off, but another algo to look at is the days-to-cover example. It has some decile trading in it. You may be able to stitch it together using some of the algos on the site.

If you're using P/E and P/B of the entire stock universe, you're going to need to spell them out by hand. We don't have an automated way (yet) to spell out custom universes.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.