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I can offer three suggestions:
(a) Since any model, however sophisticated, will miss tail cases (such as Oct 2008) I would increase the number of high-frequency factors (eg weekly jobless claims - I don't know if that is a relevant example in your case - but just to give you an idea) in the model. Not only does that... |
Hopefully these ideas open up some solution strategies.
A. Calibration approach:
In the case of a volatility model such as Axioma's above, you could perform an instantaneous volatility adjustment. Procedure:
1. You build your usual T+H volatility model.
2. You measure the realized volatility and implied volati... |
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 ... |
Hopefully these ideas open up some solution strategies.
A. Calibration approach:
In the case of a volatility model such as Axioma's above, you could perform an instantaneous volatility adjustment. Procedure:
1. You build your usual T+H volatility model.
2. You measure the realized volatility and implied volati... |
Hopefully these ideas open up some solution strategies.
A. Calibration approach:
In the case of a volatility model such as Axioma's above, you could perform an instantaneous volatility adjustment. Procedure:
1. You build your usual T+H volatility model.
2. You measure the realized volatility and implied volati... |
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 ... |
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... |
I think there is a result that some generalizations of the Vickrey auction to two sided trading do not have balanced budgets: i.e. require additional incentives from the market maker. It occurs as a consequence of avoiding any participant's price being dependent on their own input. The "Vickrey" approach would be to m... |
I think there is a result that some generalizations of the Vickrey auction to two sided trading do not have balanced budgets: i.e. require additional incentives from the market maker. It occurs as a consequence of avoiding any participant's price being dependent on their own input. The "Vickrey" approach would be to m... |
Is there any relationship between kurtosis, skewness preferences and risk aversion coefficient in Utility function of individual, the function used in portfolio optimization?
Logically there should a relationship exist, as all of this somehow present the attitude of the investor to risk.
Thank you
Pasha |
Is there any relationship between kurtosis, skewness preferences and risk aversion coefficient in Utility function of individual, the function used in portfolio optimization? Apprximately, in what range should they be?
Logically there should a relationship exist, as all of this somehow present the attitude of the inve... |
Is there any relationship between kurtosis, skewness preferences and risk aversion coefficient in Utility function of individual, the function used in portfolio optimization? Apprximately, in what range should they be?
Logically there should a relationship exist, as all of this somehow present the attitude of the inve... |
Is there any relationship between kurtosis, skewness preferences and risk aversion coefficient in Utility function of individual, the function used in portfolio optimization? Aproximately, in what range should they be?
Logically, there should a relationship exist, as all of this somehow present the attitude of the inv... |
Is there any relationship between the risk aversion coefficient in an individual's utility function (commonly used in portfolio optimization) and the preference for higher moments such as skewness and kurtosis? In what range, approximately, should they be? Logically, a relationship should exist, as they all somehow r... |
What is the relationship between risk aversion and preference for skewness and kurtosis in portfolio optimization? |
Yes. Check out the Lower Partial Moments literature. In my view the best introduction to this is [Narwrocki][1] - A Brief History of Downside Risk Measures.
[1]: http://www.google.com/url?sa=t&source=web&cd=2&sqi=2&ved=0CCYQFjAB&url=http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.22.262&rep=rep1&type=pd... |
Yes. Check out the Lower Partial Moments literature. In my view the best introduction to this is [Narwrocki][1] - A Brief History of Downside Risk Measures.
[1]: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.22.262&rep=rep1&type=pdf&rct=j&q=nawrocki%20lower%20partial%20moments&ei=5apVTuWKKoaDgAff3PAT&... |
Yes. Check out the Lower Partial Moments literature. In my view the best introduction to this is [Narwrocki][1] - A Brief History of Downside Risk Measures. Uryasev established equivalence between CVaR approach and low partial moments. If Markowitz had the tools at the time time, LPM utility functions would be the intr... |
I had to ask this question. I can understand C++ program can be optimized pretty well and faster than anything else. But in this era, the performance of a program written in a language based on frameworks such as C# and Java can be pretty close to that of C++ while maintenance cost of the program would be so lower than... |
What's the reason C++ is still the most popular language in QF? |
How can I compute the predicted return from a linear regression that includes a number of different terms. For instance, suppose my equation is:
$r_{future} = \alpha + \beta_1 r_{history} + \beta_2 x_{news} + \beta_3 r_{history} * x_{news} $
Where $r$ is the geometric return, and $x$ is a news dummy variable (0 ... |
Expected return from a multiple linear regression? |
I had to ask this question. I can understand C++ program can be optimized pretty well and faster than anything else. But in this era, the performance of a program written in a language based on frameworks such as C# and Java can be pretty close to that of C++, while the maintenance cost of the program would be so much ... |
Why is C++ still a very popular language in quantitative finance? |
I had to ask this question after reading the answers to http://quant.stackexchange.com/questions/306/what-programming-languages-are-most-commonly-used-in-quantitative-finance. I can understand C++ program can be optimized pretty well and faster than anything else. But in this era, the performance of a program written i... |
Why is C++ still a very popular language in quantitative finance? |
I had to ask this question after reading the answers to http://quant.stackexchange.com/questions/306/what-programming-languages-are-most-commonly-used-in-quantitative-finance. I can understand C++ program can be optimized pretty well and faster than anything else. But in this era, the performance of a program written i... |
I often hear people talking about the skew of the volatility surface, model, etc... but it appears to me that a clear standard definition is not unanimously in place among practitioners.
**So here is my question:** Does anyone has a clear and unifying definition that can be stated in mathematical terms of what skew ... |
What is the implied volatility skew? |
I had to ask this question after reading the answers to http://quant.stackexchange.com/questions/306/what-programming-languages-are-most-commonly-used-in-quantitative-finance I understand that C++ programs can be optimized pretty well and are faster than anything else. But in this era, the performance of a program writ... |
I'm having a problem in which a time series of 24 data points is given to forecast the next 12 data points. This 24 data points might be sparse (many are missing).
Do you have any suggestion on what technique can be used?
Thanks, |
Techniques for forecasting short-frame data? |
I'm having a problem in which a time series of 24 data points is given to forecast the next 12 data points. This 24 data points might be sparse (many are missing).
Do you have any suggestion on what technique can be used?
Thanks,
ADDED: The series is a transformed data from tabulated dataset which shows a me... |
Many mutual funds sell "asset allocation" products which include appropriately sized investments in a variety of asset classes meant for a prototypical investor. Some of these, such as PIMCO, even include direct commodity investments in the portfolio. Pension funds often base their investments on a model portfolio, w... |
Should the average investor hold commodities as part of a broadly diversified portfolio? |
Yes
---
- [Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes][1]
- [Strategic Asset Allocation and Commodities][2]
- [The Case for Commodities][3]
- [An Asset Class for All Seasons: The Benefits of a Strategic Allocation to
Commodities][4]
No
--
- [Should Investors... |
In order to properly answer this question, I would ask that you also tell us:
1. Is the "skill" variable continuous or discrete? How is it actually measured?
2. Can you put theoretical bounds on the skill? Is it, say, between 0 and 1, or in some well-defined range?
3. Do you expect skill to change over the ne... |
Is there any research on applying state-space or dynamic linear models to forecasting equity risk premia on a security-by-security basis with a medium term horizon (say 3 month to 12 months horizon)?
Markov Models are a special case of state-space models where the states are discrete. There's an avalanche of resear... |
Yes
---
- [Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes][1]
- [Strategic Asset Allocation and Commodities][2]
- [The Case for Commodities][3]
- [An Asset Class for All Seasons: The Benefits of a Strategic Allocation to
Commodities][4]
No
--
- [Should Investors... |
I want to include the QuantLib function for option greeks calculations in my own C++ code.
My question is: can I just include those functions? I don't want to use the rest of their stuff.
I obviously cannot just write:
QuantLib::europeanOption.delta()
I have included the header:
#include <ql/quantl... |
How at ease are you with programming, dynamic linking, Makefiles and the rest?
In essence, there is no magic here. QL has a very liberal license, and you "merely" have to set up your project such that it finds
- the quantlib headers (and hence Boost headers) during compilation
- the quantlib library durin... |
Can one use options on Treasury bond futures to hedge a typical fixed income portfolio? If so, how can one estimate the duration for an option on a Treasury futures contract, and taking this a step further, how would one then use the duration to determine the option's contribution to the overall portfolio duration? |
Can one use options on Treasury futures to hedge a portfolio? |
High Frequency Trading (HFT) seems to be the big money making mystery machine these days. The purported source of unlimited floods of gelt pouring into the investment shops using it.
For me, HFT is first of all nothing else but trading on a different (i.e. ultra short) time scale. You can make a fast buck, but you c... |
HFT: What is the big differentiator in comparison to other time scales? |
Very informative and balanced is: <br>[The Strategic and Tactical Value of Commodity Futures][1] <br>by Claude B. Erb, CFA, and Campbell R. Harvey
One well-known scientifically based passive investment fund in Germany (ARERO) draws a ratio of 15% for commodities (60% world stocks and 25% bonds, rebalanced on a yearl... |
High Frequency Trading (HFT) seems to be the big money making mystery machine these days. The purported source of unlimited floods of gelt pouring into the investment shops using it.
For me, HFT is first of all nothing else but trading on a different (i.e. ultra short) time scale. You can make a fast buck, but you c... |
> HFT seems to be the big money making mystery machine these days.
That's not correct. By its very nature, HFT can only produce a limited amount of revenue. The big money makers are still the large hedge funds that charge 2-and-20 on their \$10B worth of assets.
> There are not too many players there at the momen... |
There are many portfolio optimization paradigms that include a preference for skewness. These are generally alternatives meant to replace the modern portfolio management mean-variance framework developed by Markowitz. Skewness (or, more generally, higher moments) are only relevant in portfolio optimization if (a) ass... |
What is the role of skewness in portfolio optimization? |
Role of skewness in portfolio optimization? |
[Fatih Yilmaz][1], formerly of Bank of America (currently BlueGold), has a piece called "Imaginal Spreads and Pairs Trading" on exactly this topic, if you can find it (I couldn't find a copy on the public internet), originally published April 17, 2009. He writes:
> Academics and industry practitioners generally con... |
A question from one of my members.
Anyone have experience hedging a long municipal bond portfolio using BMA / SIFMA swaps? Anything you can share regarding sizing and structuring the swap and monitoring / adjusting it over time? How effective has this swap been in different market scenarios? |
"Does quantity turn into quality because it is faster - and if yes, when and why?"
Yes it does. As per [The Fundamental Law of Active Management][1], all else being equal the more positive expectancy bets one can make in a given time period the higher the profitability and return per unit of risk. As Adal responded,... |
> HFT seems to be the big money making mystery machine these days.
That's not correct. By its very nature, HFT can only produce a limited amount of revenue. The big money makers are still the large hedge funds that charge 2-and-20 on their \$10B worth of assets.
> There are not too many players there at the momen... |
Do you know of any papers which consider pairs trading (or statistical arbitrage) on foreign exchange? I couldn't find any. I asked this question on several forums and got no reply. Thus I guess this trading strategy is inapplicable due to the properties of currency markets or other fundamental reasons. However, it is ... |
Is statistical arbitrage on FX possible? |
There's a huge literature on this topic going back at least 30 years, and I am unfortunately not familiar enough with this literature to give you a great answer to your specific question. However, I will in this answer at least try to point you in some useful directions according to what I've found thus far.
Kurtos... |
> HFT seems to be the big money making mystery machine these days.
That's not correct. By its very nature, HFT can only produce a limited amount of revenue. The big money makers are still the large hedge funds that charge 2-and-20 on their \$10B worth of assets.
> There are not too many players there at the momen... |
> HFT seems to be the big money making mystery machine these days.
That's not correct. By its very nature, HFT can only produce a limited amount of revenue. The big money makers are still the large hedge funds that charge 2-and-20 on their \$10B worth of assets.
> There are not too many players there at the momen... |
I am working on the Heston calibration from stock historic.
After obtaining accurate estimates of the model parameters I found very large 95% confidence intervals for these estimations if the historic size is about 10-15 years.
In view of the above graphic how would you choose the ideal historic size?
![ent... |
Large confidence interval but very accurate estimation : tradeoff? |
I am working on the Heston calibration from stock historic.
After obtaining accurate estimates of the model parameters I found very large 95% confidence intervals for these estimations if the historic size is about 10-15 years.
In view of the above graphic how would you choose the ideal historic size?
![ent... |
Large confidence interval albeit very accurate estimation : tradeoff? |
I am working on calibrating a Heston model from simulated historical stock data.
After obtaining an accurate estimate of the model parameters I found very large 95% confidence intervals for these estimations if the sample size is about 10-15 years.
In view of the graph below, how would you choose the ideal samp... |
What tradeoff is there to using an accurate estimate with a large confidence interval? |
I have a portfolio allocation strategy I want to backtest, but I need a large "universe" of ETFs for it to choose from at each time period. I was thinking of starting with a criteria such as "all ETFs available in 2000" or something like that to ensure sufficient data for a backtest.
Any suggestions as to where I c... |
Where can I find a database of ALL ETFs, sorted by age? |
Short answer - Use the betas from a multiple regression to create a hedged portfolio.
In a single factor model (i.e. hedging with only one other currency), you can interpret the Beta as the proportion of the factor that you would need to short. So if Beta = .5 then for every 1MM you are long, you would go short 2MM ... |
Short answer - Use the betas from a multiple regression to create a hedged portfolio.
In a single factor model (i.e. hedging with only one other currency), you can interpret the Beta as the proportion of the factor that you would need to short. So if Beta = .5 then for every 1MM you are long, you would go short 2MM ... |
Short answer - Use the betas from a multiple regression to create a hedged portfolio.
In a single factor model (i.e. hedging with only one other currency), you can interpret the Beta as the proportion of the factor that you would need to short. So if Beta = .5 then for every 1MM you are long, you would go short $500... |
I recently heard the term Sugihara Trading System. I guess it might be some trading strategy or a special model to predict trends in market data, but I couldn't find out anything about it. Does anyone know what's behind this term? |
What is the Sugihara Trading System? |
I'm trying to back out the implied stock rate from the market for hard to borrow equities. Can anyone point me in the right direction?
TIA |
In all the classic texts on equities derivatives, there is an assumption of the risk-free rate <i>r</i>. We can immediately dismiss the concept of a fixed rate; all interest rates are variable (and martingale?) in reality.
But also, as is more apparent in the current crisis, currency has a cost of carry, and no coun... |
Is the risk-free rate really limited by inflation? |
The dominant frequencies for Money Market and FX instruments was 6m and 3m for a long time, and banks slowly moved to commercial trades at those frequencies but funding overnight. If this is a step in the direction of increasingly short-term funding as trade frequencies and volumes increase, could banks move to continu... |
Could banks move to continuous (rather than overnight) funding? |
I have a portfolio allocation strategy I want to backtest, but I need a large "universe" of ETFs for it to choose from at each time period. I was thinking of starting with a criteria such as "all ETFs available in 2000" or something like that to ensure sufficient data for a backtest.
Any suggestions as to where I c... |
Which ETFs should I use to test my portfolio selection algorithm? |
Inflation usually has little to do with the "risk-free" nature of a rate. Also, interest rates *follow* inflation rather than the other way round i.e. QE does not "cause" inflation. QE was performed because inflation was too low in the first place and the interest rates had to be artificially lowered "below" the 0-0.25... |
[Yahoo! Finance][1] allows you to list all ETFs and sort by inception date or size.
Considering your [follow-up question][3], though, I think you are asking the wrong question here. ETFs are a relatively recent innovation. Only 32 of these ETFs were around in 2000. For example, the Nasdaq 100 ETF (QQQ), often the ... |
[Yahoo! Finance][1] allows you to list all ETFs and sort by inception date or size.
Considering your [follow-up question][3], though, I think you are asking the wrong question here. ETFs are a relatively recent innovation. Only 32 of these ETFs were around in 2000. For example, the Russell 2000 ETF (IWM), today's ... |
The dominant frequencies for Money Market and FX instruments were 6m and 3m for a long time, and banks slowly moved to commercial trades at those frequencies but funding overnight. If this is a step in the direction of increasingly short-term funding as trade frequencies and volumes increase, could banks move to contin... |
I'm trying to back out the implied stock rate from the market for hard to borrow equities. Can anyone point me in the right direction?
EDIT:
I apoligize for not being clear.
When the market is pricing options on hard to borrow securites, they include the cost that their broker is going to charge them to sell... |
When market-makers price options on hard to borrow equities, they include the cost to borrow the underlying equity that their broker is going to charge them to sell the security short to hedge. I'm trying to back out this cost. I'm guessing it is similar to implied volatility but solving for the interest rate.
Can any... |
Solving for the implied stock lending rate from equity options prices? |
When market makers price options on hard-to-borrow equities, they include the cost to borrow the underlying equity that their broker is going to charge them to sell the security short to hedge. I'm trying to back-out this cost. I'm guessing it is similar to implied volatility but I'm solving for the interest rate. Can ... |
How to solve for the implied stock lending rate given equity options prices? |
I am designing an asset allocation strategy/fund which invests in four asset classes (via four independent sub-funds):
1. Domestic equity
2. International equity
3. Domestic fixed income
4. Foreign currencies
The strategy must be fully invested in these four funds at all times. The managers of the strateg... |
How to shift amongst asset classes in response to relative value views? |
I m doing my research on estimating Value at risk using different assumptions on volatility and then compare my results based on backtesting.
I obtained results and just on question based on my results.
The different models estimates accurately in 5% confidence level rather than 1%.. Is it common result? Because th... |
Spread trading (market making) often requries a lot of orders (because you have to buy and sell at the same time by a good/best price so you need to move orders pretty often to bit other traders) But I should optimize strategy (minimize quantity of orders, maximize volume of deals), otherwise I will pay money for each ... |
market maker orders quantity optimization technics? |
Spread trading (market making) often requires a lot of orders. You have to buy and sell simultaneously at the best price, so you need to move orders pretty often to beat other traders. But I would like to optimize my strategy, minimizing the number of orders executed while maximizing the total volume of deals. Othe... |
Techniques to optimize the quantity of orders in a spread trading (market making strategy? |
Techniques to optimize the quantity of orders in a spread trading (market making) strategy? |
Spread trading (market making) often requires a lot of orders. You have to buy and sell simultaneously, so you need to move orders pretty often to beat other traders. But I would like to optimize my strategy, minimizing the number of orders executed while maximizing the total volume of deals. Otherwise I will pay f... |
Spread trading (market making) often requires placing and removing a lot of orders. You have to buy and sell simultaneously, so you need to move orders pretty often to beat other traders. But I would like to optimize my strategy, minimizing the number of orders placed while maximizing the total volume of deals. Oth... |
Techniques to optimize the placement of orders in a spread trading (market making) strategy? |
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