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How did bans on short-selling affect the derivatives markets? |
Fund managers are acting in a highly stochastic environment. What methods do you know to systematically separate skillful fund managers from those that were just lucky?
Every idea, reference, paper is welcome! Thank you! |
I did some digging and found the following papers - most of them offering quite a distinct perspective compared to classical option pricing theory!
- [Stock Options as Lotteries by Brian H. Boyer et al. (2011)][1]
- [The Efficiency of the Buy-Write Strategy: Evidence from Australia by Tafadzwa Mugwagwa et al. (2... |
When researching any sort of predictive model, whether using ordinary linear regression or more sophisticated methods such as neural networks or classification and regression trees, there seems to always be a temptation to add in more explanatory variables/factors. The in-sample performance of the model always improve... |
How many explanatory variables is too many? |
Posting this question to a LinkedIn discussion group solicited the following additional answers:
1. The underlying is relatively well understood and simple in a pricing sense. This allows you to put a complex (exotic) payoff on top.
2. The vast majority of FX spot volumes are spread among a small group of G-7 cu... |
As I understand it, the currency derivatives are meant for customers to hedge *actual exposure*. A foreign distributor obviously has exchange-rate risk, but it's hard to say who actually has risk exposure to the S&P 500. (There's the effect of beta, of course, but it's pretty rare for someone to have tangible---not jus... |
Separating the wheat from the chaff: What quant methods separate skillful managers from lucky ones? |
Various studies out there have demonstrated the very large and growing influence of high frequency trading (HFT) on the markets. HFT firms are clearly making a great deal of money from somewhere, and it stands to reason that they are making this money at the expense of every other participant in the market. Defenders... |
We know that $$C-P = PV(F_{0,T}-K)$$
When we create a synthetic forward, we buy call and sell a put at the same strike price $K$. When we buy the call why do we assume the premium is positive? When we sell the put, why do we assume the premium is negative? |
There seems to be increasing interest in risk controlled products such as volatility target indices and derivatives products on these underlyings. From a risk management perspective what are the advantages of these products? |
Why write options on a volatility target index? |
There's no rule to answer this question for you. You need some combination of:
- Judgment: Are the parameters you're including reasonable?
- Sniff test: Is there theory to justify your parameter choices, or are you just hunting for chance associations?
- Hold-outs: You correctly mention that the problem is... |
I am a PhD student in stochastic analysis/control and had a MSc degree in Financial Mathematics. Could you tell me what are the top quant institutes to do PostDoc in Europe and US? |
I want to generate synthetic forex data for the purpose of backtesting my trading algorithms. I have some rough ideas in mind on how to do this:
<blockquote>Start with a curve representing a trend, then randomly generate points around the curve according to a Gaussian or some other distribution. Then take the genera... |
I am a PhD student in stochastic analysis/control and had a MSc degree in Financial Mathematics. Could you tell me what are the top quant institutes to do PostDoc in Europe and US?
To be precise, I am interested if there is a ranking system for such schools like [this][1]. It's easy to find such a ranking for the Ma... |
I am a PhD student in stochastic analysis/control and had a MSc degree in Financial Mathematics.
I am interested in determining there is a quantitative finance ranking system for universities like [this][1]. It's easy to find such a ranking for the Math Universities, though it doesn't hold for the quantitative/fina... |
Is there a quantitative finance ranking system for universities? |
In reading about the various practices and strategies of high frequency traders, one of the most mysterious to me is "flash orders," or orders that are cancelled almost immediately after they are sent. Why do HFTs use these orders? Some of those trying to explain the practice claim it gives HFTs an informational advant... |
Why do high frequency traders use flash orders? |
What is a Heat Rate Option? |
For starters, I am not even sure why you need to ask this question. There is literally years of free tick data available for FX, just check out quant.SE's [data wiki][1].
Having said that, a Gaussian is a very poor fit to high-frequency data, particularly FX. Your strategy for simulating data depends on the idea b... |
In reading about the various practices and strategies of high frequency traders, one of the most mysterious to me is "fleeting orders," or orders that are cancelled almost immediately after they are sent (see [Hasbrouck and Saar (2011)][1]). Why do HFTs use these orders? Some of those trying to explain the practice cla... |
Why do high frequency traders use rapidly cancelled limit orders? |
In reading about the various practices and strategies of high frequency traders, one of the most mysterious to me is "fleeting orders," or orders that are cancelled almost immediately after they are sent (see [Hasbrouck and Saar (2011)][1]). Why do HFTs use these orders? Some of those trying to explain the practice cla... |
Posting this question to a LinkedIn discussion group solicited the following additional answers:
1. The underlying is relatively well understood and simple in a pricing sense. This allows you to put a complex (exotic) payoff on top.
2. The vast majority of FX spot volumes are spread among a small group of G-7 cu... |
For starters, I am not even sure why you need to ask this question. There is literally years of free tick data available for FX, just check out quant.SE's [data wiki][1].
Having said that, a Gaussian is a very poor fit to high-frequency data, particularly FX. Your strategy for simulating data depends on the idea b... |
The general problem I have is visualization of the *implied* distribution of returns of a currency pair.
I usually use QQplots for historical returns, so for example versus the normal distribution:
![QQ plots][1]
[1]: https://i.stack.imgur.com/fAeEf.png
Now I would like to see the same QQplot, but for ... |
How to derive the implied probability distribution from B-S volatilities? |
How to generate synthetic FX data for backtesting? |
That's a complicated subject. Unless you're on the trading desk of a power/chemical/refinery company, you probably won't find much information. In addition, if your company doesn't have the "marginal" (best) equipment, such that you compete on efficiency/price, you'll only watch from the sidelines.
Here's a prev... |
That's a complicated subject. Unless you're on the trading desk of a power/chemical/refinery company, you probably won't find much information. In addition, if your company doesn't have the "marginal" (best) equipment, such that you compete on efficiency/price, you'll only watch from the sidelines.
Here's a prev... |
Jason Perl's book *DeMark Indicators* details rules for calculating signals developed by Thomas DeMark. These rules are not complex in themselves, but there is no dirth of `ifelse` structure to incrementing a signal's progression.
An example of a rule from Perl's book:
"A Bearish TD Price Flip occurs when the ma... |
What programming language is best suited for implementing DeMark? |
Jason Perl's book *DeMark Indicators* details rules for calculating signals developed by Thomas DeMark. These rules are not complex in themselves, but there is no dirth of `ifelse` structure to incrementing a signal's progression.
An example of a rule from Perl's book:
"A Bearish TD Price Flip occurs when the ma... |
Which valuation measures are most useful for equity market timing? |
Take a look at Campbell's 2008 [paper][1] "Predicting Excess Stock Returns out of Sample". This paper is in reponse to Goyal & Welch's [paper][2] which argued that excess returns cannot be predicted out of sample. Also see Baekart and Ang's [paper][3] "Stock Return Predictability: Is it there?". A good theoretical fram... |
Regarding the second part of your question - You are running into the classic N>T problem (N=# assets; T=# of observations). Therefore the number of parameters you must estimate grows geometrically with each N, but only arithmetically for each day of observation. Because you are estimating the diagonal portion of the c... |
Take a look at Campbell's 2008 [paper][1] "Predicting Excess Stock Returns out of Sample". This paper is in response to Goyal & Welch's [paper][2] which argued that excess returns cannot be predicted out of sample. Also see Baekart and Ang's [paper][3] "Stock Return Predictability: Is it there?". A good theoretical fra... |
You need quantmod & tseries in R to run this:
library(quantmod)
library(tseries)
pairs <- c(
"EUR/USD",
"GBP/USD",
"AUD/USD",
"USD/CAD",
"USD/CHF",
"NZD/USD"
)
name <- function(n) {
gsub("/","",n,fixed=TRUE)
}
getFrame <- function(p) {
result <- NULL
as.data.frame(lappl... |
Why does this Co-integrated basket look too good to be true? |
I have a trading system that chooses top 10 stocks in Nasdaq 100 ranked on relative strength and some other factors. However, I'd like to take positions in only 5 of these 10 stocks based on how minimally correlated these are to others for diversification effect. How do I resolve this? I do have the correlation/covar... |
You need quantmod & tseries in R to run this:
library(quantmod)
library(tseries)
pairs <- c(
"EUR/USD",
"GBP/USD",
"AUD/USD",
"USD/CAD",
"USD/CHF",
"NZD/USD"
)
name <- function(n) {
gsub("/","",n,fixed=TRUE)
}
getFrame <- function(p) {
result <- NULL
as.data.frame(lappl... |
There is much speculation to what degree financial series are random (and what kind of randomness prevails).
I want to turn the question on its head and ask:
*Is there a mathematical proof that whatever trading strategy you use you cannot beat a random walk (that is the expected value will always be 0 assuming no... |
Various studies out there have demonstrated the very large and growing influence of high frequency trading (HFT) on the markets. HFT firms are clearly making a great deal of money from somewhere, and it stands to reason that they are making this money at the expense of every other participant in the market. Defenders... |
How do I find the most diversified portfolio, or least correlated subset, of stocks? |
I need to implement a reverse stress testing model (definition [here](http://www.fsa.gov.uk/pages/About/What/International/stress_testing/firm_s/reverse_stress_testing/index.shtml))
I have searched around and cannot find anything substantial on the topic. Does anyone know of any good papers/references regarding act... |
What research exists regarding implementation of reverse stress testing? |
How to reconstruct a discontinued economic time series such as the Fed's CP rate? |
That post has been up since March. Either he hasn't figured it out, or he's trying to get people to click through to the book.
In the following statement, isn't he implying that "rw" is a return (as in....random walk)?
rw <- rnorm(100)
In the following statements, isn't he calling a "trade" the DIFFEREN... |
In reading about the various practices and strategies of high frequency traders, one of the most mysterious to me is "fleeting orders," or orders that are cancelled almost immediately after they are sent (see [Hasbrouck and Saar (2011)][1]). Why do HFTs use these orders? Some of those trying to explain the practice cla... |
It is well known that vanilla fixed for float swaps usually have a bit of gamma, but does a float for float (basis) swap have it? For the sake of simplicity let's assume that a both legs of the swaps on the same currency. |
Are there any gamma in basis (float/float) interest rates swaps? |
It is well known that vanilla fixed for floating swaps usually have a bit of gamma, but does a floating for floating (basis) swap have any? For the sake of simplicity, let's assume that both legs of the swaps are in the same currency. |
Is there any gamma in basis (i.e., floating for floating) interest rates swaps? |
You 'can' beat random work. Here is your mathematical proof.
Let's define some mathematical notations for derivation, and rephrase your question without losing generality. Now suppose a trader plays a fair game, so the surplus X(0), X(1), X(2), ... X(t) is a martingale. Can the trader find a stopping time s such th... |
You 'can' beat random work. Here is your mathematical proof.
Let's define some mathematical notations for derivation, and rephrase your question without losing generality. Now suppose a trader plays a fair game, so the surplus X(0), X(1), X(2), ... X(t) is a martingale. Can the trader find a stopping time s such th... |
I can help you beat random walk 'in the way you want', i.e. the expected value is positive even assuming no drift, but no more. Here is your mathematical proof.
Let's define some mathematical notations for derivation, and rephrase your question without losing generality. Now suppose a trader plays a fair game, so t... |
I can help you beat random walk 'in the way you want', i.e. the expected value is positive even assuming no drift, but no more. Here is your mathematical proof.
Let's define some mathematical notations for derivation, and rephrase your question without losing generality. Now suppose a trader plays a fair game, so t... |
There are many online sources about common risk factors in investing and trading e.g. market risk, credit risk, interest rate risk. There are various factor models (Fama-French, Carhart) and risk management methods to mitigate them.
What are examples of non-financial risk, such as hardware or network connection fai... |
Can anyone explain the process and the calculations needed to select a portfolio of liquid futures assets with the least correlation? Given a set of returns for a series of assets, how do I select the best subset such that I minimize their correlation with each other? |
How can I select the least correlated portfolio of assets? |
What are some examples of non-financial risks and contingency plans? |
I'm just starting to work with QuantLib and wonder if I'm going down a very wrong path.
I'm working on a site that presents the visitor with a table of streamed real-time options data, including Theoretical Value calculated by the stream provider. The visitor, as I envision it, is a normal-type casual retail custome... |
Is QuantLib more trouble than it's worth? |
I'm just starting to work with QuantLib and wonder if I'm going down a very wrong path.
I'm working on a site that presents the visitor with a table of streamed real-time options data, including Theoretical Value calculated by the stream provider. The visitor, as I envision it, is a normal-type casual retail custome... |
I'm just starting to work with QuantLib and wonder if I'm going down a very wrong path.
I'm working on a site that presents the visitor with a table of streamed real-time options data, including Theoretical Value calculated by the stream provider. The visitor, as I envision it, is a normal-type casual retail custome... |
Numerical methods are only **approximations**. So binomial trees, Monte Carlo simulations, and finite difference methods should all produce different numbers.
As for whether you should install it for your customers, that can only be answered by what you think your customers want. Do retail customers really want the ... |
May I ask references for building an automated trading system? |
I am a postgrad student doing a master in Signal Processing and I have graduated from an engineering school
I was wondering if there are any jobs in finance that are opened to people having this kind of background? I don't know much about finance but I've seen the words "algorithmic trading" or "HF trading" thrown aro... |
signal processing + finance? |
Check out page 55 in "Quantitative Equity Investing: Techniques and Strategies," Fabozzi et al.
Section is titled "Random Matrix Theory" - very intro. The context pertains to the estimation of a large covariance matrix.
Also, see work at Capital Fund Management, filed under:
[Random Matrix and Finance : corre... |
I can help you beat random walk 'in the way you want', i.e. the expected value is positive even assuming no drift, but no more. Here is your mathematical proof.
Let's define some mathematical notations for derivation, and rephrase your question without losing generality. Now suppose a trader plays a fair game, so t... |
References for building an automated trading system? |
I am looking for references on the architecture of automated trading systems and the trading algorithms behind them. I am more interested in system development than analysis. A couple of books I found are [Building Automated Trading Systems][1] by van Vliet and [Quantitative Trading][2] by Chan. Any other tips or ref... |
References for developing an automated trading system? |
A friend of mine who studies game theory suggested that credit ratings from the bond ratings agencies, such as Moody's, S&P, and Fitch, may suffer from a sort of "ratings inflation" similar to the grade inflation seen in many colleges. What are the forces driving grade inflation and how would those same forces apply t... |
Do bond credit ratings suffer from "ratings inflation"? |
Additionally I would recommend [Evidence-based technical analysis by David Aronson][1]
It explains the whole process (including the complete statistical background) of rigorously setting up the basis for your trading system.
See for a short summary of important points here: [CXO Advisory][2]
See for a review ... |
Is it possible to download a list of stocks that belong to a specific exchange (e.g. NASDAQ, AMEX, NYSE)? The `tseries` package has a function to download the price history of a stock, but how to get all the stocks of an exchange?
|
How to get a list of stocks symbol of a specific exchange? |
I just finished <a href="http://www.amazon.com/High-Frequency-Trading-Practical-Algorithmic-Strategies/dp/0470563761/ref=sr_1_1?ie=UTF8&qid=1314053187&sr=8-1">"High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems"</a> by Irene Aldridge -- I think it provides a very good overview of HF... |
What is the best data structure/implementation for representing a time series? |
Mean-Variance optimization is the standard finance answer to this question.
However, solutions can be costly since the weights will likely be dispersed across many instruments raising fixed transactions costs. I would consider [Sparse PCA][1] as another solution where you can specify cardinality constraints on the ... |
Consider using a uniform price double auction if you need a two-sided trading institution -- for buying or selling -- but want something like the kind of truth-telling incentive found in the Vickrey auction.
In the Uniform Price Double Auction, truth-telling bids/asks are incentive compatible if you are not the pr... |
Mean-Variance optimization is the standard finance answer to this question.
However, solutions can be costly since the weights will likely be dispersed across many instruments raising fixed transactions costs. I would consider [Sparse PCA][1] as another solution where you can specify cardinality constraints on the ... |
Here is a more or less formal proof of the fact that "the system can't be beaten". The argument works whenever the underlying process is a [martingale][1]. In particular, it is valid for a random walk without drift.
Let $S=\{S_n\}$ be a discrete-time martingale which represents a series of games played at times $... |
How to generalize the Vickrey auction for two-sided trading? |
Can CAPM betta attrack the risk of particular market relative to international market? |
You are absolutely right to point out that most *proactive* participants in options markets prefer to be long gamma, and it is typically *reactive* market makers who take the opposite side of their trades. While the typical options trader (I find it difficult to call anyone trading options an "investor") does not hedg... |
Can the CAPM beta of emerging markets be less than the beta of the developed markets?
As part of my research, I run regressions using market indices. I estimate the beta using a regression of MSCI country/region excess returns on the excess returns of the MSCI ACWI. Excess returns are returns minus the risk-free r... |
How well does CAPM beta track the risk of a particular market relative to world markets? |
I am trading with standart deviation bands(6 bands) on detrended data.How can I find the most profitable signals with neural network or GA with standart deviation bands?Should I first find the slope degree of n bars of trendline (example 50 bars linear trendline slope is 30 degree) then calculate bands distance to ... |
I am trading with standard deviation bands (6 bands) on de-trended data. How can I find the most profitable signals with neural network or GA with standard deviation bands? Should I first find the slope degree of n bars of trend line (for example, 50 bars linear trend line slope is 30 degree) then calculate bands dis... |
How to calculate optimal standard deviation bands for trading? |
I'm just starting to work with QuantLib and wonder if I'm going down a very wrong path.
I'm working on a site that presents the visitor with a table of streamed real-time options data, including Theoretical Value calculated by the stream provider. The visitor, as I envision it, is a normal-type casual retail custome... |
What kind of computer hardware, in additional to the 'conventional' fare, is actually used in trading? And what languages is it typically programmed in? I'm interested in ASICs, FPGAs, that sort of thing. |
What kind of specialized hardware is used in trading? |
Suppose we train on m individuals consisting of T observations (i.e. MxT design matrix). The dependent variable is one-year return for each security (H = horizon of one year). In a factor model specification, we align security characteristics and economic factor exposures observed at time T with the dependent variable ... |
Suppose we train on M individuals consisting of T observations (i.e. TxM design matrix). The dependent variable is one-year return for each security (H = horizon of one year). In a factor model specification, we align security characteristics and economic factor exposures observed at time T with the dependent variable ... |
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