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Who has introduced the term 'vega' and why? |
One cannot directly buy and sell the VIX index. Theoretically, however, one could approximate the index by purchasing an at-the-money straddle on the SP500, then delta-hedging the straddle.
**Does anyone have experience with such a "synthetic" replication of the index?** It might be very useful for betting on volati... |
Are there common procedures prior or posterior backtesting to ensure that a quantitative trading strategy has real predictive power and is not just one of the thing that has worked in the past by pure luck? Surely if we search long enough for working strategies we will end up finding one. Even in a walk forward approac... |
What are the popular methodologies to minimize data snooping? |
Are there any free/cheap data sources for equity options and bonds?
I have been able to download (historical) stock prices via yahoo and google. |
Building an effective backtest is not significantly different than building any other kind of predictive model. The goal is to have similar behavior *out of sample* as you have *in sample*. As such, there are methodologies developed in statistics and machine learning that can be useful:
- Understand the bias/var... |
Prompted in part by [this question on data snooping][1], I would be interested to know:
What are the key risks that should be considered when developing a quantitative strategy based on: (a) historical data or (b) simulated data?
[1]: http://quant.stackexchange.com/questions/140/what-are-the-popular-methodolo... |
What are the key risks to the quantitative strategy development process? |
I work with practical, day-to-day trading: just making money. One of my small clients recently hired a smart, new MFE. We discussed potential trading strategies for a long time. Finally, he expressed surprise that I never mentioned (much less used) stochastic calculus, which he spent many long hours studying in his MFE... |
What is the role of stochastic calculus in day-to-day trading? |
I want to create a lognormal distribution of future stock prices. Using a monte carlo simulation I came up with the standard deviation as being $\sqrt(days/252)$ $\*volatility*mean*$ $\log(mean)$. Is this correct?
|
I want to create a lognormal distribution of future stock prices. Using a monte carlo simulation I came up with the standard deviation as being $\sqrt{(days/252)}$ $\*volatility*mean*$ $\log(mean)$. Is this correct?
|
I heard about MetaTrader from [http://www.metaquotes.net][1]. Is there any other framework or program available? Do you use different software for backtracking and running your trading algorithms?
Thank you guys for your great answers. I will check out the posted applications.
[1]: http://www.metaquotes.net |
Here are a few risks when using historical data:
- *Data fidelity:* Is your data an accurate reflection of history? For stocks, should you use actual closing prices or adjusted prices? For futures, how should you construct a realistic, continuous contract?
- *Simulation realism:* Are you making realistic assumpti... |
When faced with a black box trading strategy with extensive historical data available, how would one select/construct a representative benchmark?
As a trivial example, when a strategy historically consists only of long trades on tech stock, the Nasdaq Composite index might be a suitable benchmark.
What about be... |
How to select/construct benchmarks for black-box trading strategies? |
Clearly, it's much more difficult than for a white-box strategy.
But you still have some information:
- What is the return profile?
- What is the average holding period?
- Does it go long/short?
- What assets are traded?
Now you can choose a benchmark of an index that matches these criteria as closel... |
There are a few things that form the common canon of education in (quantitative) finance, yet everybody knows they are not exactly true, useful, well-behaved, or empirically supported.
So here is the question: which is the single worst idea still actively propagated?
Please make it one suggestion per post. |
What concepts are the most dangerous ones in actual quantitative finance work? |
What concepts are the most dangerous ones in quantitative finance work? |
"Historical"?
Please, note that you cannot always trust the data, sometimes they are nominal or real, and sometimes you won't know the type of data. So you should coherently use the data (particularly with historical data it is good idea to test data with many providers).
- [Shiller Data][1]
- the huge data co... |
> "Historical"?
What do you mean by that? Nominal, real, corrected due to monetary-base-change, corrections with Y-other-things? Alas looking historical data from Google/Yahoo's screeners can be highly misleading and making conclusion based on it very dangerous. Please, note that you cannot always trust the data, so... |
> -- (historical) stock prices --
What do you mean by that? Nominal, real, corrected due to monetary-base-change, corrections with Y-other-things? What is your goal?
> I have been able to download (historical) stock prices via yahoo and google.
Alas looking historical data from Google/Yahoo's screeners can be... |
> -- (historical) stock prices --
What do you mean by that? Nominal, real, corrected due to monetary-base-change, corrections with Y-other-things? What is your goal?
> I have been able to download (historical) stock prices via yahoo and google.
Alas looking historical data from Google/Yahoo's screeners can be... |
I'd like to get a feel for the operating parameters of official market makers. I'm looking more for discerning characteristics, rather than exact numbers or an exhaustive list of each MM.
Examples: what is their working capital? How much leverage do they use intraday? What returns do they achieve? What is their con... |
Operating parameters of market makers? |
Suppose you have two sources of covariance forecasts on a fixed set of $n$ assets, method A and method B (you can think of them as black box forecasts, from two vendors, say), which are known to be based on data available at a given point in time. Suppose you also observe the returns on those $n$ assets for a following... |
I'm currently using IB's java api and getting feeds through them. However the realtime feed is updated only every 250ms and the historical feed only every second.
I'm primarily looking for ES data and other index futures and ETFs. I'm not looking at FX since that data is the most subjective since there is no exchang... |
http://www.quantnet.com/forum/showthread.php?t=2159 |
From http://www.quantnet.com/forum/showthread.php?t=2159
- Historical FX Rates: <http://oanda.com/convert/fxhistory>
- Historical Stock Prices: <http://finance.yahoo.com/q/hp?s=yhoo>
- Recent LIBOR rates: <http://www.bba.org.uk/public/libor/>
- Some Implied Volatilities: <http://www.ivolatility.com/>
- Delayed C... |
> **Value at Risk**
The great idea to have systematic indicator for risk exposure but the problems arise when
- it's used as main or single indicator without looking at other risks (e.g Credit risk or Liquidity risk). Emanuel Derman wrote about it recently [in his blog][1]:
> But they (GS) did it not with... |
As far as I know MCMC and also (PMCMC) can be usefull for (bayesian) estimation of parameters of some Hidden process like in the Heston Model case based on observations of the Stock (filtering). But the problem here is that those estimates are not matching those based on calibration of vanilla options of the Risk Neutr... |
MCMC can be used to for bayesian inference of other Models with hidden variable. Gibbs sampling is for exemple used in Hidden Markov Models. Here is a papper that discuss the diferences between MCM and the more classical approach using the EM algorithm.
http://ba.stat.cmu.edu/journal/2008/vol03/issue04/ryden.pdf
... |
What approaches are there for stress testing a portfolio? |
Is there a way to estimate (predict) the half life of a quantitative trading system? |
Let's say I have a brand new fancy model on some asset class (calibration porcedure included over a set of vanilla options) in which I truly believe I made a step forward comparing to existing litterature (a phantasmatic situation I recognize).
Which criteria should be in order so I can claim that I am in a positio... |
I go out on a limp and say *No*.
You can of course observe how it does, but making a prediction about how and it decays is difficult to impossible with any degree of precision. You'd need a meta-model of the market as a whole. And, well, if you had that, wouldn't you use that knowledge to make your model better? |
I go out on a limp and say *No*.
You can of course observe how it does, but making a prediction about how and it decays is difficult to impossible with any degree of precision. You'd need a meta-model of the market as a whole. And, well, if you had that, wouldn't you use that knowledge to make your model better?
... |
I go out on a limb and say *No*.
You can of course observe how it does, but making a prediction about how and when it decays is difficult to impossible with any degree of precision. You'd need a meta-model of the market as a whole. And, well, if you had that, wouldn't you use that knowledge to make your model bet... |
Let's say you want to calculate a VaR for a portfolio of 1000 stocks. You're really only interested in the left tail, so do you use the whole set of returns to estimate mean, variance, skew, and shape (let's also assume a skewed generalized error distribution - SGED)? Or would you just use the left tail (let's say the ... |
How are distributions for tail risk measures estimated in practice? |
If I design a trading model, I might want to know the [model's half life][1]. Unfortunately, it doesn't seem possible to predict alpha longevity without a [meta-model of the market][2]. Intuitively, such a meta-model does not exist, but has that ever been proven? This sounds like a Russell's paradox or Gödel's incomple... |
Why is there no "meta-model"? |
The practice of using Gaussian copulas in modeling credit derivatives has come under a lot of criticism in the past few years. What are the major arguments against using the copula method in this respect? |
What are the limitations of Gaussian copulas in respect to pricing credit derivatives? |
If I design a trading model, I might want to know the [model's half life][1]. Unfortunately, it doesn't seem possible to predict alpha longevity without a [meta-model of the market][2]. Intuitively, such a meta-model does not exist, but has that ever been proven? This sounds like a Russell's paradox or Gödel's incomple... |
How to explain what is stationary process? To start with what's meant by process in the first place, and then what process has to be like, so I can call it stationary? |
What is stationary process? |
If you want a 'pop science' account for it, the [Wired article by Felix Salmon](http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all) is a pretty good start.
If you want harder technical stuff, well then you can start at [the Wikipedia article and its section on Applications](http://en.wikipedia... |
A very excellent discussion of stationarity as it relates to trading can be found in Sherry's (Sherrys'?) [Mathematics of Technical Analysis][1] (poorly organized, but very useful book). As he puts it, if the price changes of a stock, etc., are stationary over a time period, the underlying rules generating the price ... |
I am doing research on uncertainty analysis and risk assessment for oil field development. For doing economic forecast and valuation I use Real Options theory, which is almost similar to theory used in finance. RO theory is used for valuation of a real, tangible asset etc. My question is as follow:
I have forecast o... |
Appropriate measure of Volatility for economic returns from an asset? |
I am doing research on uncertainty analysis and risk assessment for oil field development. For doing economic forecast and valuation I use Real Options theory, which is almost similar to theory used in finance. RO theory is used for valuation of a real, tangible asset etc. My question is as follow:
I have forecast o... |
I would split the question into two sub-question:
1. Is market beta useful at all?
2. Is market beta useful for high-frequency strategies that are fully hedged EOD?
With regards to the first question, I would summarize the hundreds of papers on the subject as: yes, but not as much as it was initially believed.... |
I have several measures:
1. Profit and loss (PNL).
2. Win to loss ratio (W2L).
3. Avg gain to drawdown ratio (AG2AD).
4. Max gain to maximum drawdown ratio (MG2MD).
5. Number of consecutive gains to consecutive losses ratio (NCG2NCL).
If there were only 3 measures (A, B, C), then I c... |
I notice that on the surface, there are some similarities between quantitative sports betting and quantitative finance. Both has the concept of arbitaging etc.
What are the applications of quantitative finance that lend themselves readily to sports betting? |
If you want a 'pop science' account for it, the [Wired article by Felix Salmon](http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all) is a pretty good start.
If you want harder technical stuff, well then you can start at [the Wikipedia article and its section on Applications](http://en.wikipedia... |
There are several application of Lévy alpha-stable distributions to finance, especially in insurance and reinsurance. I believe that [Embrechts-Kluppelberg-Mikosh's "Modelling Extremal Events for Insurance and Finance"][1] is still an excellent reference. However, in the modeling of stock prices, this line of research ... |
Suppose that you and other bettors participate in a lottery with $N$ possible outcomes; event will occur with probability $\pi_n$. There are $N$ basic contracts available for purchase. Contract $n$ costs $p_n$ and entitles you to one dollar if outcome $n$ occurs, zero otherwise.
Now, imagine that you have a continge... |
I would split the question into two sub-questions:
1. Is market beta useful at all?
2. Is market beta useful for high-frequency strategies that are fully hedged EOD?
With regards to the first question, I would summarize the hundreds of papers on the subject as: yes, but not as much as it was initially believed... |
My second best is **Copulas**. I won't go as far as declaring gaussian copula as [The formula that killed Wall Street][1]" (warning: lousy article), but will defer to T. Mikosch in his [very good paper][2] on misuses of copulas.
[1]: http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
[2]:... |
**Backtesting** - pure and simple. Its the logical and obvious thing to do right? Yet, so many pitfalls lie in wait. Be very careful people. Do it as little as possible and as late as possible. |
There are certain overlaps. One example is the so called **favourite-longshot-bias**. Some authors like Ziemba, Tomkins and Hodges try to combine both fields:
see e.g.:<br>
http://en.wikipedia.org/wiki/Favourite-longshot_bias<br>
http://www.nccr-finrisk.uzh.ch/media/pdf/ziemba.pdf<br>
http://favourite-longshot-bi... |
In *Paul Wilmott on Quantitative Finance Sec. Ed.* in vol. 3 on p. 784 and p. 809 the following stochastic differential equation: $$dS=\mu\ S\ dt\ +\sigma \ S\ dX$$ is approximated in discrete time by $$\delta S=\mu\ S\ \delta t\ +\sigma \ S\ \phi \ (\delta t)^{1/2}$$ where $\phi$ is drawn from a standardized normal di... |
There are many corporate actions that will affect the stock price, like dividend, stock split and rights.
Given a large series of historical price data, how do we adjust the data to filter out the effect of the corporate action? |
How does the strategies deal with corporate actions? |
I've asked this [question][1] here at Physics SE, but I figure that some parts would be more appropriate to ask here. So I'm rephrase the question again.
We know that for option value calculation, path integral is one way to solve it. But the solution I get from the Black-Scholes formula (derive from the [above ques... |
**Knowledge leads to profit BUT NOT the reverse**
The scientific method is your friend here. Wandering away from reality into fantasy is so tempting but will lead to failure. Step away from the P&L!
Question -> observe -> theory -> predict -> measure -> record/publish/peer review -> repeat
Think long and hard ... |
Everyone seems to agree that the option prices predicted by the Black-Merton-Scholes model are inconsistent with what is observed in reality. Still, many people rely on the model by using "the wrong number in the wrong formula to get the right price".
>**Question.** What are some of the most important contradictions... |
How do strategies deal with corporate actions? |
Very good book addressing such "puzzles of finance" - highly recommended!<br>
http://books.google.de/books?id=iqMdG4TTWNYC&lpg=PP1&ots=FCP8K8OXTv&dq=puzzles%20of%20finance&hl=en&pg=PP1#v=onepage&q&f=false |
My second best is
> **Copulas**
I won't go as far as declaring gaussian copula [The formula that killed Wall Street][1]" (warning: lousy article), but will defer to T. Mikosch in his [very good paper][2] on misuses of copulas.
[1]: http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
... |
Very good book addressing such "puzzles of finance" - highly recommended!<br>
http://books.google.de/books?id=iqMdG4TTWNYC&lpg=PP1&ots=FCP8K8OXTv&dq=puzzles%20of%20finance&hl=en&pg=PP1#v=onepage&q&f=false
The paradoxes that are treated here are:<br>
- Siegel's Paradox.
- Likelihood of Loss.
- Ti... |
Everyone seems to agree that the option prices predicted by the Black-Merton-Scholes model are inconsistent with what is observed in reality. Still, many people rely on the model by using "the wrong number in the wrong formula to get the right price".
>**Question.** What are some of the most important contradictions... |
What is the intuition behind cointegration... What dickey fuller test does to test for it? Ideally non-technical explanation would be appreciated...
Actually, say you need to explain it to your investor and justify why your pairs trading strategy should make him rich! |
The standard story (also told by @vonjd) is of "The Drunk and Her Dog". This is based on ["A Drunk and Her Dog: An Illustration of Cointegration and Error Correction"][1] (1994). The story is itself based on the standard illustration for a [random walk][2] known as the "drunkard's walk".
I'm not entirely sure what... |
The standard story (also told by @vonjd) is of "The Drunk and Her Dog". This is based on ["A Drunk and Her Dog: An Illustration of Cointegration and Error Correction"][1] (1994). The story is itself based on the standard illustration for a [random walk][2] known as the "drunkard's walk".
I'm not entirely sure what... |
There is also so called Hakansson’s paradox that can be found in [Derman's article][1] on dynamic replication
> Hakansson’s so-called paradox (Hakansson 1979, Merton
1992) encapsulates the skepticism about dynamic replication:
if options can only be priced because they can be
replicated, then, since they can be r... |
(1) You analytically solve a stochastic differential equation (SDE) using [Ito's lemma][1]. Your second equation is how you could model one path over one step. To find the solution, you could to model many of these paths and then take the expectation (i.e., Monte Carlo methods). The solution to the SDE models all of th... |
(1) You analytically solve a stochastic differential equation (SDE) using [Ito's lemma][1]. Your second equation (the discretized one) is how you could model _one_ path over _one_ step. To find the solution, you would model many of these paths over many steps and then take the expectation (i.e., Monte Carlo methods). T... |
Suppose that you and other bettors participate in a lottery with $N$ possible outcomes; event will occur with probability $\pi_n$. There are $N$ basic contracts available for purchase. Contract $n$ costs $p_n$ and entitles you to one dollar if outcome $n$ occurs, zero otherwise.
Now, imagine that you have a continge... |
(1) You analytically solve a stochastic differential equation (SDE) using [Ito's lemma][1]. Your second equation (the discretized one) is how you could model _one_ path over _one_ step. To find the solution, you would model many of these paths over many steps and then take the expectation (i.e., Monte Carlo methods). T... |
How do they differ in what they imply about an underlying's (or any varable's) movement? |
What's the difference between volatility and variance? |
I've asked this [question][1] here at Physics SE, but I figured that some parts would be more appropriate to ask here. So I'm rephrasing the question again.
We know that for option value calculation, path integral is one way to solve it. But the solution I get from the Black-Scholes formula (derived from the [above ... |
For a vanilla option, I know that the probability of the option expiring in the money is simply the delta of the option... but how would I calculate the probability, without doing monte carlo, of the underlying touching the strike at some time at or before maturity?
|
How do they differ in what they imply about an underlying's (or any variable's) movement? |
How can I use a binomial tree to price a European option that's based on a portfolio of equity products? I have volatility and correlation matrix of all underlying products?
Looking for a formula based solution so that I use in Matlab. Thanks. |
If I design a trading model, I might want to know the [model's half life][1]. Unfortunately, it doesn't seem possible to predict alpha longevity without a [meta-model of the market][2]. Intuitively, such a meta-model does not exist, but has that ever been proven? This sounds like a Russell's paradox or Gödel's incomple... |
I've always wondered about this.
If you have a series of options, with the expires spaced let's say one week between them, and you search for each expiration date the option with the smallest premium, would the series of strikes represent the current market predicted path of the asset?
Can you use that informatio... |
Is it possible to use a series of option prices to predict the most likely path of an asset? |
If you think of a path as a series of ranges then your idea kind of makes sense.
However, I don't think you would get a path out of this approach, just a series of ranges.
Example:
Taking one expiry, the prices in a chain imply a range of price movements between today and expiration.
Take the SPX(at say 1300)... |
What is the intuition behind cointegration? What does the Dickey-Fuller test do to test for it? Ideally, a non-technical explanation would be appreciated.
Actually, say you need to explain it to your investor and justify why your pairs trading strategy should make him rich! |
I've asked this [question][1] here at Physics SE, but I figured that some parts would be more appropriate to ask here. So I'm rephrasing the question again.
We know that for option value calculation, path integral is one way to solve it. But the solution I get from the Black-Scholes formula (derived from the [above ... |
Does the debt load of a company have impact on the stock price of a company and its volatility? Also, how does the market react to the announcement of a company issuing bonds? |
The model assumption of the Black-Scholes formula has two parameters for the geometric Brownian motion, the volatility $\sigma$ and the expected growth $\mu$ (which disappears in the option formulae). How can this parameter $\mu$ be estimated? |
How much is QuantLib used in industry and how much street cred does it have? |
Can Someone Explain to me what this term means, and how it's used?
|
I think this has something to do with my question ("[Black Equivalent Volatility][1]"). I just realized that the answer might be your question:
> Knowing this information what could be the appropriate measure of computing volatility of the economic returns from my reservoir?
In Energy Markets, like oil and elect... |
Many times, we want to calculate VaR using some parametric approach (delta-normal approximation for instance) when historical simulation or monte carlo are simply to slow. This is fine as long as only the deltas are needed and the instruments are reasonably linear.
But when the approach is extended to use both delta... |
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