Mind the gap - by Quantitativo - Quant Trading Rules
Many of Isaac Newton's early theories and ideas were met with skepticism or outright failure. Newton spent years working on problems related to motion, optics, and gravity, often facing dead ends and revisions.
In fact, throughout most of his career, Newton was very loathe to publish due to his high intellectual standards and his aversion to the public controversies that publishing original ideas inevitably attracted.
I am not that worried about public controversies. Whenever I believe I have found an idea that meets my quality standards, I publish it. Also, I am not that worried about being wrong: at the end of the day, the ideas I am sharing are about models, and as George Box has said, “all models are wrong.” (But some are useful.)
Nevertheless, sometimes it takes me a few experiments, and quickly, I find something worthy of sharing by my standards. However, sometimes, it takes me a lot of failed experiments until I arrive at something. That's one of the reasons why it took me three weeks since the last article to publish this one.
This week's idea is a study on gaps. It's the first statistical investigation on how trading stocks that have shown gaps between days might be a profitable idea as long as we have a careful execution to control slippage.
