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How to estimate probability of default from bond prices? |
It's not clear to me how to realize skew arbitrage? And there seems no well-known recipe like volatility arbitrage?
http://en.wikipedia.org/wiki/Volatility_arbitrage
Wiki: "Volatility arbitrage (or vol arb) is a type of statistical arbitrage implemented by trading a delta neutral portfolio of an option and its ... |
How to realize skew arbitrage: hedge the edge in a vertical spread? |
It's not clear to me how to realize skew arbitrage? And there seems no well-known recipe like volatility arbitrage?
http://en.wikipedia.org/wiki/Volatility_arbitrage
Wiki: "Volatility arbitrage (or vol arb) is a type of statistical arbitrage implemented by trading a delta neutral portfolio of an option and its ... |
The paper ["Do option markets correctly price the probabilities of movement of the underlying asset? "][1] by Yacine AmKt-Sahalia, Yubo Wang, and Francis Yared should in my opinion provide many very usefull elements for this question (look in particular at section 3).
Regards
[1]: http://www.princeton.edu/~yaci... |
In their 1990 book, [A Non-Random Walk Down Wall Street][1], Andrew Lo and Craig MacKinlay document a number of persistent predictable patterns in stock prices. One of these "anomalies" is variously known as lead-lag or serial cross-correlation, and it says that the returns of larger, more liquid stocks tend to lead t... |
Is there data on market participants at a particular moment? |
It's not clear to me how to realize skewness. In other words, how do you implement skew arbitrage? There seems to be no well-known recipe like in [volatility arbitrage][1].
> Volatility arbitrage (or vol arb) is a type of statistical arbitrage implemented by trading a delta neutral portfolio of an option and its u... |
Skew arbitrage: How can you realize the skewness of the underlying? |
Suppose funds X and Y are the same but X has 0.25% higher management cost. Suppose we are analyzing a 2 year interval. The simple models with discrete/continuous interval -assumptions are not really right below. I will get more specific in the end.
1. discrete intervals `0.9975**2`
2. continuous intervals $e^{0.00... |
How to quantify the impact of management cost on return? |
Here's a paper by [Dangl, Halling, and Randl (2006)][1] that uses a dynamic linear model to forecast the equity risk premium.
[1]: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=887780&http://www.google.com/url?sa=t&source=web&cd=8&ved=0CFMQFjAH&url=http://papers.ssrn.com/sol3/Delivery.cfm?abstractid=887780&... |
In theory, how should volatility affect the price of a binary option? A typical out the money option has more extrinsic value and therefore volatility plays a much more noticeable factor. Now let's say you have a binary option priced at .30 as people do not believe it will be worth 1.00 at expiration. How much does vo... |
How does volatility affect the price of binary options? |
I ran a Johansen cointegration test on 3 instruments, A B and C.
The results that I got are:
R<=x | Test Stat | 90% | 95% | 99%
0 --> 36.7 | 18.9 | 21.1 | 25.8
1 --> 8.4 | 12.29 | 14.26 | 18.52
2 --> 0.21 | 2.7 | 3.8 | 6.6
---------------------------------------... |
How to interpret the eigenmatrix from a Johansen cointegration test? |
Sorry if the question sounds rough.
It's not my intention to devaluate something I've not yet understood like Quantitative Finance.
So to keep it simple:
1. **is Quantitative Finance a science, like Math or Physics?**
2. Or is it something more similar to Technical Analysis, but
with much more math into ... |
Is Quantitative Finance a science or a set of mathematical theories applied empirically to predict future? |
[BJO06][1] estimate the following CIR model for market variance, $\sigma^2_t$:
$\mathrm{d}\sigma^2_t = (\alpha_0 + \alpha_1\sigma^2_t)\mathrm{d}t + \sqrt{\beta_1}\sigma_t\mathrm{d}W_t$
To estimate their model they use $\left(\frac{VIX_t}{100}\right)^2$ as a proxy to $\sigma^2_t$, where $VIX_t$ is the daily VIX pr... |
[BJO06][1] (Table 2) estimate the following CIR model for market variance, $\sigma^2_t$:
$\mathrm{d}\sigma^2_t = (\alpha_0 + \alpha_1\sigma^2_t)\mathrm{d}t + \sqrt{\beta_1}\sigma_t\mathrm{d}W_t$
To estimate their model they use $\left(\frac{VIX_t}{100}\right)^2$ as a proxy to $\sigma^2_t$, where $VIX_t$ is the da... |
At what point does someone using technical analysis become a Quant? |
The paper ["Do option markets correctly price the probabilities of movement of the underlying asset? "][1] by Yacine Aït-Sahalia, Yubo Wang, and Francis Yared should in my opinion provide many very usefull elements for this question (look in particular at section 3).
Regards
[1]: http://www.princeton.edu/~yacin... |
[BJO06][1] (Table 2) estimate the following Cox-Ingersoll-Ross model for market variance, $\sigma^2_t$:
$\mathrm{d}\sigma^2_t = (\alpha_0 + \alpha_1\sigma^2_t)\mathrm{d}t + \sqrt{\beta_1}\sigma_t\mathrm{d}W_t$
To estimate their model they use $\left(\frac{VIX_t}{100}\right)^2$ as a proxy to $\sigma^2_t$, where $V... |
Can VIX be interpreted as a proxy for instantaneous volatility? |
Any research on how natural language processing can be used to forecast stocks? |
[BJO06][1] (Table 2) estimate the following Cox-Ingersoll-Ross model for market variance, $\sigma^2_t$:
$\mathrm{d}\sigma^2_t = (\alpha_0 + \alpha_1\sigma^2_t)\mathrm{d}t + \sqrt{\beta_1}\sigma_t\mathrm{d}W_t$
To estimate their model they use $\left(\frac{VIX_t}{100}\right)^2$ as a proxy to $\sigma^2_t$, where $V... |
Expectancy is defined as "How much money gained for every $1 risked".
What is the expectancy for this particular series of trades?
* Risked €1, won €2
* Risked €2, won €1
* Risked €3, won €6
|
How do I calculate expectancy from a past series of trades in my trading account? |
Lets see if I have this right:
Expectancy = average win / average loss.
Thus:
* Risked €1, won €2 means total wins are now €1 for 1 trade.
* Risked €2, won €2 means total losses are now €1 in 1 trade.
* Risked €3, won €6 means total wins now rise to €4 over 2 trades.
* Risked €3, won €6 means total wins now... |
Expectancy is defined as "How much money gained for every $1 risked".
What is the expectancy for this particular series of trades?
* Risked €1, won €2
* Risked €2, won €1
* Risked €3, won €6
* Risked €3, won €6
|
I ran a Johansen cointegration test on 3 instruments, A B and C.
The results that I got are:
R<=x | Test Stat | 90% | 95% | 99%
r=0 --> 36.7 | 18.9 | 21.1 | 25.8
r=1 --> 8.4 | 12.29 | 14.26 | 18.52
r=2 --> 0.21 | 2.7 | 3.8 | 6.6
----------------------------... |
*I am still struggling to get the notion of the problem myself, so bear with me in case it feels a little bit raw.*
In the recent months I came to the conclusion that there are not only certain **regimes** in the markets (like bear or bull) but phases where all models fail because we are in uncharted territory. The ... |
Van Tharp addresses expectancy in his book, [Trade Your Way to Financial Freedom][1].
Here is his definition of expectancy.
$\frac{winPct * winAmt - losePct * loseAmt}{trades}$
I would recast your trades as follows:
- Won €1
- Lost €1
- Won €3
- Won €3
Your winning percentage is 75%. Your losing pe... |
In the recent months I came to the conclusion that there are not only certain **regimes** in the markets (like bear or bull) but phases where all models fail because we are in uncharted territory. The former are **pockets of predictability**, as I like to call them, the latter are phases were it is best to stay out of ... |
How to build a regime-switching model which knows its own limits? |
In recent months I've come to the conclusion that there are not only certain **regimes** in the markets (like bear or bull) but phases where all models fail because we are in uncharted territory. The former are **pockets of predictability**, as I like to call them, the latter are phases where it is best to stay out of ... |
In [Oracle Crystal Ball][1], we use an old algorithm, that works pretty well and converges fast. It is from Iman-Conovar. Here is the reference:
Iman, R.L., Conover, W.J. 1982. A distribution-free approach to inducing rank
correlation among input variables. Commun. Statist.-Simula. Computa. 11, 311-334.
That sa... |
What techniques are used for testing order book implementations? |
There's various research showing how priors such as the minimum variance portfolio turn out to be a surprisingly effective shrinkage target in portfolio construction.
The sell point of these priors is they do not require a return estimate. Therefore these shrinkage targets add ballast to otherwise noisy return esti... |
Choice of prior as a shrinkage target in portfolio construction? |
High VIX arguably leads to less predictability of the market factor (i.e. market timing), but high volatility does lead to greater predictability of the cross-section of returns. Indeed, linear risk factor models have higher explanatory power during bear markets.
However, your goal is to build a better market timing... |
High VIX arguably leads to less predictability of the market factor (i.e. market timing), but high volatility does lead to greater predictability of the cross-section of returns. Indeed, linear risk factor models have higher explanatory power during bear markets.
However, your goal is to build a better market timing... |
I know you're really looking for some empirical work on this topic, but I think the following theoretical paper puts your question into proper perspective.*
[Risk-Based Asset Allocation: A New Answer to an Old Question by Wai Lee,][1] [JPM 2011][2].
Overall, he finds that supposedly risk-based approaches to portf... |
Even companies with just a single non-callable corporate bond outstanding will often have CDS quote spreads that differ from the bond quote spread. During the 2008 crisis, there were dozens of cases where true arbitrages were available.
You could argue these arbitrages were due to forced selling of bond inventory (... |
How to define and measure liquidity or funding premium in credit markets? |
From remote memory,
1. The first question is Yes/No question. Is there any stationary, i.e. I(0), time series for different levels of combination r? This question is answered by your first table.
* For example, if [r=2]'s test stat is say 7 while the critical value of 99% confidence is 6.6 like your example, th... |
For me, the questions are
1. who is using R? (large companies?)
2. Who is hiring R programmers and does it look like a language of choice in a field (finance, medical, automotive) with a strong future?
I've been developing in C/C++ for almost 17 years now and it has easily kept me gainfully employed. I star... |
As a disclaimer, I'm a noted advocate of using Python to build production systems for quant finance (old talk but: http://python.mirocommunity.org/video/1531/pycon-2010-python...). I've been very successful at doing it and largely as the result of my example many other quant shops have chosen the Python route to excell... |
From remote memory,
1. The first question is Yes/No question. Is there any stationary, i.e. I(0), time series for different levels of combination r? This question is answered by your first table.
* For example, if [r=2]'s test stat is say 7 while the critical value of 99% confidence is 6.6 like your example, th... |
From remote memory,
1. The first question is Yes/No question. Is there any stationary, i.e. I(0), time series for different levels of combination r? This question is answered by your first table.
* For example, if [r=2]'s test stat is say 7 while the critical value of 99% confidence is 6.6 like your example, th... |
From remote memory,
1. The first question is Yes/No question. Is there any stationary, i.e. I(0), time series for different levels of combination r? This question is answered by your first table.
* For example, if [r=2]'s test stat is say 7 while the critical value of 99% confidence is 6.6 like your example, th... |
High VIX arguably leads to less predictability of the market factor (i.e. market timing), but high volatility does lead to greater predictability of the cross-section of returns. Indeed, linear risk factor models have higher explanatory power during bear markets.
However, your goal is to build a better market timing... |
I am backtesting stock strategies, in a system that does only simple buys/sells. [No options or tax calculation] It's resolution is measured by day. That means that only one buy or sell can happen a day. Is there a general rule of thumb about the limit on the rate of return?
If its measured over a week a 20x return... |
I need to calculate the put-call ratio for an American option. But I'm a complete naïf: I don't know how. I *think* I'd use the put open interest and the call open interest. I can imagine two ways to calculate PCR:
1. Simply (as some references tell me) take OI<sub>puts</sub> divided by OI<sub>calls</sub> and there'... |
What do we really mean by put-call ratio? |
I need to calculate the put-call ratio for an American option. But I'm a complete naïf: I don't know how. I *think* I'd use the put open interest and the call open interest. I can imagine two ways to calculate PCR:
1. Simply (as some references tell me) take OI<sub>puts</sub> divided by OI<sub>calls</sub> and there'... |
What do we really mean by put-call ratio? And how sholuld I express it? |
Quite simply, no, you can't bound returns.
Assuming you can invest in several assets, and that you can short-sell, you could quite easily make a huge return by simply getting (maybe even just by pure luck) the right directions on an especially volatile way.
You can't bound complex strategies daily return.
If y... |
I am backtesting stock strategies, in a system that does only simple buys/sells. [No options or tax calculation]
Its resolution is measured by day.
That means that only one buy or sell can happen a day.
Is there a general rule of thumb about the limit on the rate of return?
If its measured over a week, a 2... |
I am backtesting an equity trading strategy which trades only once per day. Is there a general rule of thumb for the reasonable upper bound on the rate of return of such a strategy? For example, a 2000% return over a week might be unrealistic, but a 20% return is possible. Identifying a reasonable limit may help me ... |
What is a reasonable upper bound on the performance of a daily trading strategy? |
I need to calculate the put-call ratio for an American option. But I'm a complete naïf: I don't know how. I *think* I'd use the put open interest and the call open interest. I can imagine two ways to calculate PCR:
1. Simply (as some references tell me) take OI<sub>puts</sub> divided by OI<sub>calls</sub> and there'... |
What do we really mean by put-call ratio and how should it be expressed? |
Does anyone have any idea where I can get this type of data? I am trying to compare my the Sharpe Ratio of my strategy to the major players. |
What is the average Sharpe Ratio of Volatility Arb funds? |
Look at ''the volatility surface' by jim gatheral
http://www.amazon.com/Volatility-Surface-Practitioners-Guide-Finance/dp/0471792519/ref=sr_1_1?ie=UTF8&qid=1317915885&sr=8-1
|
Look at [The Volatility Surface by Jim Gatheral][1]
[1]: http://www.amazon.com/Volatility-Surface-Practitioners-Guide-Finance/dp/0471792519/ref=sr_1_1?ie=UTF8&qid=1317915885&sr=8-1 |
Where can I get data on performance metrics for volatility arbitrage funds? I am trying to compare the Sharpe ratio of my strategy to those of the major players. |
What is the average Sharpe ratio of volatility arbitrage funds? |
This question has been answered at dsp.SE: [Here][1].
(P.S.: I don't know why the forum software converted babelproofreader's answer into a comment?!? Now it seems to have worked...)
[1]: http://dsp.stackexchange.com/questions/208/what-should-be-considered-when-selecting-a-windowing-function-when-smoothing-a-... |
Contradiction in Black-Scholes discrete time framework??-of course not, but i simply dont see it... |
Great question!
I think the most useful starting point is [Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options by Bakshi, Kapadia and Madan (2003)][1]. Their paper proposes a definition of model-free implied skewness (they originally called it risk-neutral skewness, bu... |
I'm reading a book titled "A Trader's Money Management System" and it discusses risk of ruin(ROR) tables. It says that you can have a zero probability of ROR with a payoff ratio of 2 to 1 and a win rate of 60%.
- My understanding is that the concept of ROR originated in gambling, but is it applicable to trading and ... |
I'm trying to find an optimal way to allocate capital among trading strategies.
A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.
> f = μ/σ<sup>2</sup>, where μ i... |
I'm trying to find an optimal way to allocate capital among trading strategies.
A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.
> f = μ/σ<sup>2</sup>, where μ i... |
To respond to your questions in order:
- The formula looks deceptively simple. Does it actually work?
That depends on what you mean by "work". Chan spends the rest of the chapter discussing the pitfalls of investing at "full Kelly".
- Do professionals use it at all?
Professionals may maximize geometric gro... |
I'm trying to find an optimal way to allocate capital among trading strategies.
A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.
> f = μ/σ<sup>2</sup>, where μ i... |
First of all a very warm welcome to *Quantitative Finance Stack Exchange* :-)
Concerning your question there are some basic points that seem to be unclear. In general "Quantitative Trading" by Ernie Chan is a good starting point for learning about quantitative trading strategies. The problem is of course that in thi... |
First of all a very warm welcome to *Quantitative Finance Stack Exchange* :-)
Concerning your question there are some basic points that seem to be unclear. In general "Quantitative Trading" by Ernie Chan is a good starting point for learning about quantitative trading strategies. The problem is of course that in thi... |
First of all a very warm welcome to *Quantitative Finance Stack Exchange* :-)
Concerning your question there are some basic points that seem to be unclear. In general "Quantitative Trading" by Ernie Chan is a good starting point for learning about quantitative trading strategies. The problem is of course that in thi... |
First of all a very warm welcome to *Quantitative Finance Stack Exchange* :-)
Concerning your question there are some basic points that seem to be unclear. In general "Quantitative Trading" by Ernie Chan is a good starting point for learning about quantitative trading strategies. The problem is of course that in thi... |
I am a programmer and I have no finance background. I am looking for advice as to how to get started in the quant finance industry. My goal would be to have solid understanding about the industry and be able to program something interesting, side project projects. But so far I have no idea how to get started.
So far... |
How to get started in quant finance? |
I am a programmer and I have no finance background. I am looking for advice as to how to get started in the quant finance industry. My goal would be to have solid understanding about the industry and be able to program something interesting, side project projects. But so far I have no idea how to get started.
So far... |
Why doesn't Black-Scholes work in discrete time? |
What is a good broker for HFT? |
I'm trying to find an optimal way to allocate capital among trading strategies.
["Quantitative Trading"][1] by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.
> f = μ/σ<sup>2</sup>, where μ is the mea... |
How to optimally allocate capital among trading strategies? |
I'm wading through the vast sea of literature on realized volatility estimation and expected volatility forecasting (see, e.g. [Realized Volatility][1] by Andersen and Benzoni, which cites 120 other papers, and [Volatility][2] by Bandi and Russell, which cites a slightly overlapping set of 120 papers).
I'm having a ... |
How to estimate the expected volatility from panel data? |
How to forecast expected volatility from equity panel data? |
My objective is to measure the modified-CVAR for a portfolio given it's weights and matrix of security returns. Luckily the wonderful package PerformanceAnalytics has an ES() function that does just this.
Issue I am having is that modified-CVAR takes minutes to compute when according to this [paper][1] (by the same... |
I have to implement option pricing in c++ using MCMC. Is there some paper which describes this in detail so that i can learn from there and implement? |
I have to implement option pricing in c++ using Markov chain Monte Carlo. Is there some paper which describes this in detail so that I can learn from there and implement? |
Reference on Markov chain Monte Carlo method for option pricing? |
My objective is to measure the modified-CVAR for a portfolio given its weights and matrix of security returns. Luckily the wonderful package PerformanceAnalytics has an ES() function that does just this.
The issue I am having is that modified-CVAR takes minutes to compute, when according to this [paper][1] (by the ... |
How to compute modified-CVaR in the PerformanceAnalytics package? |
I'm building an algorithmic trading business. I'd be grateful for informed comments and opinions on my trading strategy search methodology.
**Goal**
Develop (profitable!) fully automated intra-day trading strategies.
**Markets**
I'm focusing on FX futures and equity index futures on CME and LIFFE. Becuase:... |
Is my trading strategy search methodology sound? |
I'm building an algorithmic trading business. I'd be grateful for informed comments and opinions on my trading strategy search methodology.
**Goal**
Develop (profitable!) fully automated intra-day trading strategies.
**Markets**
I'm focusing on FX futures and equity index futures on CME and LIFFE. Becuase:... |
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