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Are there quantitative models which can guide one's choice of target risk? |
Usually in asset allocation you have a quantitative approach (which can be from example mean-variance), but you (or you and your firm) also have a more qualitative approach given market-conditions, economic outlooks, or tactical indicators.
Hence, you will eventually come up with 2 allocations, the ones strictly dic... |
How do you mix quantitative asset allocation with qualitative views? |
Why do expected return models and risk models use different factors? |
I am calculating betas on intraday trade data ( lets say 15 minute intervals). For simplicity sake, lets assume I am modelling
Y = $\beta$ * X + c ,
where Y is return of XLF and X is return of SPY.
If I want to run this on 5 days of intraday data, should I remove the jump that happens due to opening gaps on th... |
How to account for jumps in intraday data when calculating beta? |
I am calculating betas on intraday trade data at 15-minute intervals. For simplicity sake, let's assume I am modeling
\begin{equation}
Y = \beta * X + c
\end{equation}
where $Y$ is the return of XLF and $X$ is the return of SPY.
If I want to run this on five days of intraday data, should I remove the jump th... |
Traditional portfolio optimization involves mean variance optimization, where only the mean and covariance matrix of returns are estimated. What asset allocation and portfolio optimization techniques make use of the higher order moments of the returns distribution? Also, how would one compute the higher order matrices... |
How can higher moments be applied to portfolio optimization in an asset allocation context? |
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... |
**This answer is my ongoing attempt to consolidate some recent commentary on this hot topic.**
A good place to start for anyone thinking about this question is the Economists's [Buttonwood: Not So Fast][1], which mentions recent research by [Biais and Woolley (2011)][2] and [Dichev, Huang, and Zhou (2011)][3].
[D... |
I have always felt that equity market making was a speed game for HFTs. But recently I talked to someone on the buy side, who made a claim to the contrary. He argued that with the right market making model/strategy, you can generate good returns without having the speed advantage that HFTs have. He claims to be using a... |
Is equity market making a game of speed? |
There is a vast, growing body of literature on [*risk parity*][1], much of which is predicated on this idea (i.e. of optimizing a portfolio allocation without including expected return). As an example, *The Journal of Investing* put out an entire issue dedicated to the subject last year: see ["Latest Approaches to Ris... |
Do you know the [Black-Litterman Model][1]?
> In principle Modern Portfolio Theory (the mean-variance approach of Markowitz) offers a solution to this problem once the expected returns and covariances of the assets are known. While Modern Portfolio Theory is an important theoretical advance, its application has univ... |
Traditional portfolio optimization involves mean variance optimization, where only the mean and covariance matrix of returns are estimated. What asset allocation and portfolio optimization techniques make use of the higher order co-moments of the returns distribution? Also, how would one compute the higher order matri... |
How can higher co-moments be applied to portfolio optimization in an asset allocation context? |
By definition, an option's premia is the sum of intrinsic value and time value. The time value of premia declines as the option goes more ITM ("in-the-money") or OTM ("out-of-the-money"), ceteris paribus.
An intuitive explanation for this can be found by thinking of time value as the expected P&L of a long option p... |
Two important points going beyond the technical aspect that haven't been mentioned here.
The first is transparency. For example, I sometimes hear the NYSE DMM is an alternative market making model safer than the HFT liquidity frenziness. But what do we now of the additional cost incurred by investors when operating ... |
How does an [option's time value][1] (also known as *extrinsic* or *instrumental* value) depend on how far it is in the money or out of the money? In other words, how does the time value change as the underlying price changes?
[1]: http://en.wikipedia.org/wiki/Option_time_value |
I feel that the best way to answer your question is to first quote your problematic idea and then carefully explain the subtle alternative. :)
> The derivation of the Black-Scholes PDE is based on the assumption that the price of the option should change in time in such a way that ... And my question is: Why do we a... |
I was going through [AVELLANEDA (2008)][1]a paper on stat arb
[1]: http://math.nyu.edu/faculty/avellane/AvellanedaLeeStatArb20090616.pdf
Interesting that Avellaneda uses asset returns vs its etfs to compute the s-score. Wondering if anyone has tried this approach to pairs trading ? How does it compare to th... |
I feel that the best way to answer your question is to first quote your problematic idea and then carefully explain the subtle alternative. :)
> The derivation of the Black-Scholes PDE is based on the assumption that the price of the option should change in time in such a way that ... And my question is: Why do we a... |
I feel that the best way to answer your question is to first quote your problematic idea and then carefully explain the subtle alternative. :)
> The derivation of the Black-Scholes PDE is based on the assumption that the price of the option should change in time in such a way that ... And my question is: Why do we a... |
I feel that the best way to answer your question is to first quote your problematic idea and then carefully explain the subtle alternative. :)
> The derivation of the Black-Scholes PDE is based on the assumption that the price of the option should change in time in such a way that ... And my question is: Why do we a... |
These approaches require that you blend views on expected returns rather than weights. This is more natural since weights are product of some optimization (one might be short a security for hedging purposes despite having a positive expected return view for the security).
If you arrived a those weights via a mean-va... |
If you arrived a those weights via a mean-variance utility optimization you can back-out the implied expected returns based on these weights and a risk aversion parameter. (Indeed, this is the approach Black-Litterman took to back-out the implied expected returns from a set of benchmark weights, and Jay Walters shows t... |
If you arrived at the weights via a mean-variance utility optimization you can back-out the implied expected returns based on these weights and a risk aversion parameter. (Indeed, this is the approach Black-Litterman took to back-out the implied expected returns from a set of benchmark weights, and Jay Walters shows th... |
If you arrived at the weights via a mean-variance utility optimization you can back-out the implied expected returns based on these weights and a risk aversion parameter. (Indeed, this is the approach Black-Litterman took to back-out the implied expected returns from a set of benchmark weights, and Jay Walters shows th... |
The derivation of the Black-Scholes model assumes no counterparty risk. Does the presence of counterparty risk invalidate the argument behind the model? |
Can you fully hedge an option in the presence of counterparty risk? |
If you arrived at the weights via a mean-variance utility optimization you can back-out the implied expected returns based on these weights and a risk aversion parameter. (Indeed, this is the approach Black-Litterman took to back-out the implied expected returns from a set of benchmark weights, and Jay Walters shows th... |
If you arrived at the weights via a mean-variance utility optimization you can back-out the implied expected returns based on these weights and a risk aversion parameter. (Indeed, this is the approach Black-Litterman took to back-out the implied expected returns from a set of benchmark weights, and Jay Walters shows th... |
If you arrived at the weights via a mean-variance utility optimization you can back-out the implied expected returns based on these weights and a risk aversion parameter. (Indeed, this is the approach Black-Litterman took to back-out the implied expected returns from a set of benchmark weights, and Jay Walters shows th... |
I am new to investing. I understand that the P/E ratio along with other data can be used to determine whether a stock may or may not be undervalued.
Are there situations where a HIGH P/E is actually beneficial? Say for instance you have a stock with a P/E of 20. If the earnings-per-share on that stock increases by ... |
Can a higher P/E ratio be beneficial under certain circumstances? |
I am new to investing. I understand that the P/E ratio along with other data can be used to determine whether a stock may or may not be undervalued.
Are there situations where a HIGH P/E is actually beneficial? Say for instance you have a stock with a P/E of 20. If the earnings-per-share on that stock increases by ... |
Options are actually some of the least susceptible securities to the adverse impact of counterparty risk. I refer to listed options, such as those cleared through the OCC (Options Commodity Clearinghouse) in Chicago, IL. The OCC is a true **central clearing counterparty** (CCC) because it bears all default risk, by dis... |
The general idea of cleansing a correlation matrix via [random matrix theory][1] is to compare its eigenvalues to that of a random one to see which parts of it are beyond normal randomness. These are then filtered out and one is left with the non-random parts.
A one-dimensional analog would be to compare the return ... |
The derivation of the Black-Scholes model assumes no counterparty risk. Does the presence of counterparty risk invalidate the argument behind the model?
EDIT: The question is about options in general, not just the exchange-traded ones. BS model is used to price FX options, or -- in a modified form known as "Black 19... |
I was going through [AVELLANEDA (2008)][1] a paper on stat arb
Interesting that Avellaneda uses asset returns vs its etfs to compute the s-score. Wondering if anyone has tried this approach to pairs trading ? How does it compare to the [johansen's method][2], where the actually price series is used ?
I can't... |
I have always felt that equity market making was a speed game for HFTs. But recently I talked to someone on the buy side, who made a claim to the contrary. He argued that with the right market making model/strategy, you can generate good returns without having the speed advantage that HFTs have. He claims to be using a... |
Options are actually some of the least susceptible securities to the adverse impact of counterparty risk. I refer to listed options, such as those cleared through the OCC (Options Commodity Clearinghouse) in Chicago, IL. The OCC is a true **central clearing counterparty** (CCC) because it bears all default risk, by dis... |
I was going through the paper of [AVELLANEDA (2008)][1] on stat arb and I found it interesting that he uses asset returns vs its etfs to compute the s-score.
I am wondering if anyone has tried this approach to pairs trading ? How does it compare to the [johansen's method][2], where the actual price series is used ? ... |
If you arrived at the weights via a mean-variance utility optimization you can back-out the implied expected returns based on these weights and a risk aversion parameter. (Indeed, this is the approach Black-Litterman took to back-out the implied expected returns from a set of benchmark weights, and Jay Walters shows th... |
What are the different methods / techniques used in Pair Trading? |
I was going through the paper of [Avellaneda (2008)][1] on stat arb and I found it interesting that he uses asset returns vs. their respective ETFs to compute the s-score.
I am wondering if anyone has tried this approach to pairs trading. How does it compare to [Johansen's method][2], where the actual price series i... |
How do different methods and techniques used in pairs trading compare? |
I'm investigating a situation where the chance for gain or loss is the same, but the amount gained is greater than the amount that is lost. For example, the gain would be about 30% of the trade amount, and the loss would be 20% of the trade amount.
If one has amount I to invest, what considerations need to be taken... |
I'm investigating a situation where the chance for gain or loss is the same, but the amount gained is greater than the amount that is lost. For example, the gain would be about 30% of the trade amount, and the loss would be 20% of the trade amount.
If one has amount ***I*** to invest, what considerations need to b... |
I'm investigating a situation where the chance for gain or loss is the same, but the amount gained is greater than the amount that is lost. For example, the gain would be about 30% of the trade amount, and the loss would be 20% of the trade amount. While there is slightly more to it than that, that is the core of it ... |
I'm investigating a situation where the chance for gain or loss is the same, but the amount gained is greater than the amount that is lost. For example, the gain would be about 30% of the trade amount, and the loss would be 23% of the trade amount. While there is slightly more to it than that, that is the core of it ... |
What is the optimal strategy when there is an equal chance for gain or loss but the size of the potential gain is larger? |
What C++ math libraries are typically used by quants? |
I am using data from EODATA and Google finance to run a model in Matlab for when I should buy an option of a particular stock. I'm still developing it and working out kinks, however I am wondering what benchmark should I use for backtracking. Like for equities one could say their portfolio outperformed the S&P, I would... |
When testing your strategy, what you need to pay particular attention to is performance attribution, in other words why did you see the returns you did?
Let me give you a simple example to illustrate what I mean. Suppose I have an algorithm to pick stocks and you have a testing database of stock prices for one year.... |
What benchmark should I use for backtesting a model for when I should buy an option of a particular stock? For equities, one could say their portfolio outperformed the S&P 500. I would like to have a similar means of comparison for trading stock options. The only thing I've been able to find that I think is appropriate... |
What benchmark/index to use for backtesting a portfolio of stock options? |
When testing your strategy, what you need to pay particular attention to is performance attribution, in other words why did you see the returns you did?
Let me give you a simple example to illustrate what I mean. Suppose I have an algorithm to pick stocks and you have a testing database of stock prices for one year.... |
+1 for asking an excellent question. I agree with the answers of @Owen and @chrisaycock - I'm late to the party but perhaps this will shed some light.
How practitioners or academics answer this question will tell you a lot about their view on the nature and sources of returns and risk. For example, the Fama-French "... |
+1 for asking an excellent question. I agree with the answers of @Owen and @chrisaycock - I'm late to the party but perhaps this will shed some light.
How practitioners or academics answer this question will tell you a lot about their view on the nature and sources of returns and risk. For example, the Fama-French "... |
+1 for asking an excellent question. I agree with the answers of @Owen and @chrisaycock - I'm late to the party but perhaps this will shed some light.
How practitioners or academics answer this question will tell you a lot about their view on the nature and sources of returns and risk. For example, the Fama-French "... |
+1 for asking an excellent question. I agree with the answers of @Owen and @chrisaycock - I'm late to the party but perhaps this will shed some light.
How practitioners or academics answer this question will tell you a lot about their view on the nature and sources of returns and risk. For example, the Fama-French "... |
+1 for asking an excellent question. I agree with the answers of @Owen and @chrisaycock - I'm late to the party but perhaps this will shed some light.
How practitioners or academics answer this question will tell you a lot about their view on the nature and sources of returns and risk. For example, the Fama-French "... |
+1 for asking an excellent question. I agree with the answers of @Owen and @chrisaycock - I'm late to the party but perhaps this will shed some light.
How practitioners or academics answer this question will tell you a lot about their view on the nature and sources of returns and risk. For example, the Fama-French "... |
Has there been any rigorous study on stop loss ? When to apply it?
Has it been shown to work through proper statistical backtests?
I am interested into Equities, and preferably on European stocks.
Regards,
Siddharth |
Any research paper on stop loss? |
Has there been any rigorous study on stop loss ? When to apply it?
Has it been shown to work through proper statistical backtests?
I am interested in Equities, preferably European stocks. |
I find this one very helpful:
[Re-Examining the Hidden Costs of the Stop-Loss
by Wilson Ma, Guy Morita, Kira Detko][1]
Abstract:
> In this paper, we present general implications of the impact of
> stop-losses to future returns. The use of stop-losses change return
> distributions, but not in the way that one ... |
I learn how to price an European call option using this [video lecture][1]. The considered case is very simple. The call option gives the right to buy 100 Euros for 100 Dollars in one month from now. Now the 100 Euros cost 100 Dollars but in 1 month they will cost either 105 Euros or 95 Euros (the probability of both p... |
Can we replicate a call opcion without a bank loan and make it cheaper in this way? |
Can we replicate a call option without a bank loan and make it cheaper in this way? |
I learned how to price an European call option using this [video lecture][1]. The considered case is very simple. The call option gives the right to buy 100 Euros for 100 Dollars in one month from now. Now the 100 Euros cost 100 Dollars but in 1 month they will cost either 105 Euros or 95 Euros (the probability of both... |
Bootvis has it right -- you have to assume the same starting situation. It is true that psychologically both companies and individuals view borrowing and lending differently, but it is very useful to have a model independent of initial capital position.
In practice, of course, lending is often more lucrative then ... |
I learned how to price a European call option using this [video lecture][1]. The considered case is very simple. The call option gives the right to buy 100 Euros for 100 Dollars in one month from now. The 100 Euros cost 100 Dollars now but in 1 month they will cost either 105 Euros or 95 Euros (the probability of both ... |
Can we replicate a call option without borrowing and make it cheaper in this way? |
Worden Brothers Inc. offer a proprietary indicator called <a href="http://www.worden.com/legacy/TeleChartHelp/Content/Indicators/Time_Segmented_Volume.htm"><b>Time Segmented Volume</b></a>.
This gizmo *seems* closely to resemble <a href="http://www.investopedia.com/terms/o/onbalancevolume.asp#axzz1jpgGAbP5"><b>On Ba... |
TSV somehow better than OBV? |
Worden Brothers Inc. offer a proprietary indicator called <a href="http://www.worden.com/legacy/TeleChartHelp/Content/Indicators/Time_Segmented_Volume.htm"><b>Time Segmented Volume</b></a>.
This gizmo *seems* closely to resemble <a href="http://www.investopedia.com/terms/o/onbalancevolume.asp#axzz1jpgGAbP5"><b>On Ba... |
How is "time segmented volume" different from on-balance volume? |
Can a mortgage loan be treated like a bond and its duration calculated using the bond duration formula? More precisely, can I calculate the loan portfolio duration for duration gap analysis, with coupon payment instead of annuity payments, loan value instead of bond value, loan rate in place of yield, and using the bo... |
Can duration gap analysis be applied to mortgages? |
Worden Brothers Inc. advertise a proprietary indicator called <a href="http://www.worden.com/legacy/TeleChartHelp/Content/Indicators/Time_Segmented_Volume.htm"><b>Time Segmented Volume</b></a>.
This gizmo *seems* closely to resemble <a href="http://www.investopedia.com/terms/o/onbalancevolume.asp#axzz1jpgGAbP5"><b>O... |
How does "time segmented volume" differ from on-balance volume? |
The Quantitative Finance Stack Exchange is intended for **professionals** and **academics/students** involved in quant modeling or trading. **Basically, if you aren't earning a living at this, it's probably off topic.**
Good questions are focused on an **actual problem you face in the course of your work** as a quant ... |
I am trying to understand how to use macroeconomic data in my trading. I understand that using such data could be used to gauge an overall view of the market and how it's doing as a whole. I have been trying to make sense of the information contained to infer weights for different equities/sectors but find myself stuck... |
How to use macroeconomic indicators for long/short trading strategies? |
Steps to replicate:
Take the correlation matrix of a sample of stocks in the SP500, or a set of ETF's that are include some that are highly correlated (0.7 and above).
Problem observed:
I observe that if there are clusters of high correlations the distributions of eigenvalues I see do not seem to follow the "MP ... |
Does random matrix theory (RMT) for returns' correlation matrices apply if there are high correlations? |
I am seeing an issue when callibrating an MP distribution. Assume a log return series for the SP500 with the following dimensions
dim(xts.sp500.ret.stocksonly)
==> [1] 1133 478
sp500.cor <- cor.empirical(xts.sp500.ret.stocksonly)
sp500.eigens <- eigen(sp500.cor)$values
sp500.eigen.density <- de... |
When preforming Johansen cointegration test for 2 time series(the simple case) you need to decide the lag you want to use. Doing the test for different lags return different results that for some lag you pass the test and some fails.
My question is what is the right method based on the input data to decide what lag I... |
What is the correct procedure to choose the lag when preforming Johansen cointegration test? |
When preforming Johansen cointegration test for 2 time series (the simple case) you need to decide the lag you want to use. Doing the test for different lag levels returns different results: for some lag levels the null hypothesis can be rejected but for others it can't.
My question is what is the right method based... |
<a href="http://amibroker.com/library/detail.php?id=358"><b>amibrokers</b></a> has this calculation for TSV:
_SECTION_BEGIN(" Time Segmented Volume ");
t=(Sum(IIf( C>Ref(C,-1), (V*(C-Ref(C,-1))),IIf(C<Ref(C,-1),(V*(C-Ref(C,-1))),0)),13));
m=MA(t ,7 );
Plot(t, "Time Segmented Volume 13", colorRed... |
How to calculate time-segmented volume? |
Yes, the weights of the first eigenvector of a covariance matrix represent the market factor and also the largest source of systematic risk (variation of returns).
Why PCA? Well, PCA simply identifies the eigenvector that maximally explains the variance of the system. It turns out that this is the "market factor" - ... |
<a href="http://amibroker.com/library/detail.php?id=358"><b>amibrokers</b></a> has this calculation for TSV:
_SECTION_BEGIN(" Time Segmented Volume ");
t=(Sum(IIf( C>Ref(C,-1), (V*(C-Ref(C,-1))),IIf(C<Ref(C,-1),(V*(C-Ref(C,-1))),0)),13));
m=MA(t ,7 );
Plot(t, "Time Segmented Volume 13", colorRed... |
<a href="http://amibroker.com/library/detail.php?id=358"><b>amibrokers</b></a> has this calculation for TSV:
_SECTION_BEGIN(" Time Segmented Volume ");
t=(Sum(IIf( C>Ref(C,-1), (V*(C-Ref(C,-1))),IIf(C<Ref(C,-1),(V*(C-Ref(C,-1))),0)),13));
m=MA(t ,7 );
Plot(t, "Time Segmented Volume 13", colorRed... |
<a href="http://amibroker.com/library/detail.php?id=358"><b>amibrokers</b></a> has this calculation for TSV:
_SECTION_BEGIN(" Time Segmented Volume ");
t=(Sum(IIf( C>Ref(C,-1), (V*(C-Ref(C,-1))),IIf(C<Ref(C,-1),(V*(C-Ref(C,-1))),0)),13));
m=MA(t ,7 );
Plot(t, "Time Segmented Volume 13", colorRed... |
Spectrum analysis is often used to analyse waveforms, a common configuration for example is to create a graph where X is time, Y is freqancy and the brightness of each position represents amplitude.
Has spectrum analysis ever been used successfully as an indicator to analyse historical price data, for example the pr... |
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