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20
votes
2answers
2k views

How much data is needed to validate a short-horizon trading strategy?

Suppose one has an idea for a short-horizon trading strategy, which we will define as having an average holding period of under 1 week and a required latency between signal calculation and execution ...
19
votes
1answer
2k views

How do different methods and techniques used in pairs trading compare?

I was going through the paper of Avellaneda (2008) 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 ...
18
votes
3answers
866 views

How can an ETF outperform its benchmark index?

Deutsche Bank’s ETF platform, db X-trackers, provides a rather remarkable ETF tracking Euro Stoxx 50 (which is the most widely used regional blue-chip index in Europe). What makes it remarkable is ...
13
votes
2answers
876 views

Why isn't the Nelson-Siegel model arbitrage-free?

Assume $X_t$ is a multivariate Ornstein-Uhlenbeck process, i.e. $$dX_t=\sigma dB_t-AX_tdt$$ and the spot interest rate evolves by the following equation: $$r_t=a+b\cdot X_t.$$ After solving for $X_t$ ...
11
votes
4answers
5k views

Is statistical arbitrage on FX possible?

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 ...
9
votes
5answers
1k views

When to shut down a trend following strategy?

Suppose I have trend following strategy(on close to close data) that is not getting acceptable returns for some time. When should I start thinking about shutting it down?
8
votes
1answer
1k views

What is the average Sharpe ratio of volatility arbitrage funds?

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.
7
votes
2answers
2k views

SPX options vs VIX futures trading

Forward volatility implied by SPX options, and that of VIX futures get out of line. If there existed VIX SQUARED futures they could easily be replicated (and arbitraged) with a strip of SPX options. ...
7
votes
3answers
3k views

Why would a 6M LIBOR rate be significantly above 3M LIBOR, ED futures and swap rates?

Just was just looking at the various interest rates and noticed this: ...
7
votes
1answer
426 views

calculating arbitrage-free ranges based off outright, spread, and fly prices

This may be more applied math rather than finance focused, but I'm curious about using linear algebra techniques for generating possible arbitrage signals among outright instruments and spreads/flies ...
6
votes
3answers
624 views

Volatility arbitrage - how is the profit extracted?

Is there any paper that describes in detail how the profit is extracted in directional volatility bet (vol arb)? I mean in the case that I bet the realized volatility will be lower than currently ...
6
votes
1answer
167 views

What is the difference between market efficiency, market equilibrium, and no-arbitrage?

Aaron Brown (in the book, The Poker Face of Wall Street, p. 196), discusses four approaches to deriving the same Black-Scholes-Merton option-pricing formula: Ed Thorp, Myron Scholes, Robert ...
5
votes
1answer
549 views

Profiting from price discrepancies between stock exchanges

Here is an interesting video by Nanex: http://www.youtube.com/watch?&v=rB5jJuMP84E Perhaps some of you have already seen something similar. It is an animation of the order routing. It shows 1/2 ...
5
votes
1answer
142 views

Arbitrage with freshly issued bonds

I recently heard someone mention an arbitrage strategy involving selling freshly issued bonds and buying the "old batch" as it has shown that the liquidity in the fresh batch motivates/drives up these ...
5
votes
2answers
376 views

A few questions about signs of the Greek letters

Rho is the partial derivative of the value of call option, $C$, w.r.t the riskfree interest rate $r$: $$\rho \equiv \frac{\partial C}{\partial r}$$ In the standard B-S formula this term is positive, ...
5
votes
1answer
1k views

Implied dividend estimation

I am looking at two different ways of estimating the expected / implied dividends from market data. 1. Dividend futures I know that this asset class is not very liquid and might not be ...
5
votes
1answer
519 views

USDCAD options vs CADUSD options arbitrage?

I think I've found an arbitrage opportunity. Right now, I can do this (first via CME, second via SAXO) : BUY CADUSD AMERICAN PUT 10200 STRIKE EXPIRING 16 MAR 2011 FOR 53 pips USD SELL USDCAD ...
4
votes
2answers
413 views

What does put-call parity imply about option premiums?

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 ...
4
votes
1answer
2k views

Call option arbitrage opportunity

I am having trouble wrapping my head around some text provided to us by our lecturer (unfortunately he is currently unavailable). If we let $c$ be the price of a European call option, $S_0$ the ...
4
votes
3answers
2k views

Arbitraging OANDA continuous rollover vs other brokers' discrete rollover

Most brokers compute rollover once a day (2200 GMT), but OANDA calculates it continuously. I thought I'd cleverly found an arbitrage opportunity, but it turns out OANDA knows about this and ...
4
votes
1answer
367 views

Sufficient conditions for no static arbitrage

In Carr and Madan (2005), the authors give sufficient conditions for a set of call prices to arise as integrals of a risk-neutral probability distribution (See Breeden and Litzenberger (1978)), and ...
4
votes
2answers
95 views

arbitrage in Heston model

Really struggling in this question: Consider a market with two assets $(B,S)$ whose price dynamics satisfy \begin{equation} dB_t = B_t r dt \end{equation} \begin{equation} \quad \quad \quad \quad \, ...
4
votes
2answers
84 views

How does this follow from the separating hyperplane theorem?

This is from Pliskas book in mathematical finance. I do not know what was best to write the question so I included the pages from the book. He has not written what form of the separating hyperplane ...
4
votes
2answers
121 views

law of one price, understanding

I am reading about mathematical finance, and I was tipsed to ask the quesiton on this site. It is about the "law of one price". Just first I'll make precise the model my book uses: I have a single ...
4
votes
1answer
531 views

What research is available on the performance of convertible bond arbitrage models?

The basic principles of convertible bond arbitrage have been clear at least since Thorp and Kassouf (1967). For those who are not familiar, the arbitrage entails purchasing a convertible bond and ...
3
votes
1answer
175 views

Arbitragefree Pricing: Q vs. P

I read that the Fundamental Theorem of Asset Pricing states, that a market is arbitrage-free if and only if there exists an equivalent martingale measure Q, under which the discounted asset price ...
3
votes
1answer
101 views

Pricing of a simple contingent claim

Earlier I had the question (5.11 Tomas Bjork): $$ \frac{\partial F}{\partial t}+\frac{1}{2}x^2\frac{\partial^2 F}{\partial t^2}+x = 0 $$ $$ F(T,x) = ln(x^2) $$ And solve it using Feynman-Kac. The ...
3
votes
1answer
974 views

Understanding Passive Rebate Arbitrage

I was reading a BMO paper which offered the following example of passive rebate arbitrage: "For example, if BBD.b is trading at $4.71 - ...
3
votes
2answers
140 views

Arbitrage and dominant strategies

If there is no arbitrage there is no dominant trading strategy, but there may be arbitrage opportunities even if there are no dominant trading strategies. Could you explain this statement and bring ...
3
votes
0answers
52 views

FTAP in the model independent case, paper by Schachermayer

I have a question about the following paper by Beatrice Acciaio, Mathias Beiglböck, Friedrich Penkner, Walter Schachermayer. At the very beginning of the paper, on page 3, there are two definitions ...
3
votes
0answers
612 views

Calculating most profitable arbitrage orders on multiple market with fixed and variable fees

If I have multiple markets (let's say 5, but the solution should be generic) trading the same stock/commodity/whatever, and the markets differ in both variable fees (which are in % of the trade order) ...
3
votes
0answers
135 views

Arbitrage free price of a derivative when the price is collected over the lifetime of the derivative

Let $X_t$ be an american style financial derivative with random exercise time $T$ where $t$ and $T$ belongs to some finite set $A$. Buying this derivative requires the buyer to pay $p_t$ up to time ...
3
votes
4answers
82 views

risk-neutral valuation implies no arbitrage?

It is known that in an arbitrage-free continuous time market, the price of every asset is evaluated as the corresponding price in the replicating strategy using risk-neutral valuation. I want to ...
2
votes
2answers
860 views

Usefulness of simultaneously buying triangular and multiple arbitrages on the Forex

I have a limited financial background but I'm trying to figure out the usefulness of buying size-n arbitrages (n > 3), and I wonder the kind of risks - if any - associated with such a strategy. Say ...
2
votes
2answers
571 views

.NET statistical packages recommendation

What open source or commercial .NET statistical package would you guys recommend? I am doing statistical arbitrage in options. The functions I need mainly are regressions, optimizations..etc. It would ...
2
votes
2answers
494 views

Index arbitrage with Options when not all underlyings have options listed?

One arbitrage strategy involves looking at the price of the Index Futures price compared with the prices of the options contracts for the underlyings. My question is, can this arbitrage strategy ...
2
votes
1answer
157 views

Calibrating an Ornstein Uhlenbeck process on residuals of regression

I am trying a basic statistical arbitrage strategy as follows: Perform PCA on a log return series of a basket of stocks Regress returns against top principal components identified Calculate the ...
2
votes
3answers
87 views

Inconsistent Definition of Arbitrage in Bjork?

In Tomas Bjork's Arbitrage Theory in Continuous Time (or here), $\exists$ what seems to be 2 inconsistent definitions of arbitrage: The first definition is for the single period Binomial model The ...
2
votes
1answer
291 views

Where are creation units baskets for ETFs published?

Where can the specification of a creation unit basket for an ETF be found? This information is needed for calculating the arbitrage possible between the ETF instrument itself and the creation unit ...
2
votes
1answer
153 views

interest rate in cost of carry

What interest rates are used in practice in a stock index / futures arbitrage? I've seen cases, when the assumed rate is 3 months LIBOR, but does it mean, that everyone who does the arbitrage can ...
2
votes
1answer
713 views

Multiple (linear) regression

I am looking for some inputs on a pair trading strategy that I am trying to improve with some semi-fundamental input. The basic idea is to use multiple linear regression to estimate the price of a ...
2
votes
1answer
230 views

How Much Capital is Needed to Start an Arbitrage Strategy?

I'm trying to experiment with a simulated simple arbitrage strategy. I'm not doing this to actually invest, I'm just curious if the market is inefficient enough for this to be feasible. Every ...
2
votes
1answer
200 views

How often do ETF creation units baskets change?

Large institutions can swap baskets of underlying securities for ETF shares that can then be traded on an exchange as part of arbitrage between the price of the basket and the ETF share price. These ...
2
votes
0answers
71 views

How to exploit calendar arbitrage?

Say we are looking at European Call options in a toy environment with zero deterministic intereset rates, a stock paying no dividends, no repo rates etc. Let C(T,K) be the price of a call with expiry ...
2
votes
1answer
87 views

Why is the LIBOR-market model free of arbitrage?

Recently I have been reading a lot on the market models. One thing that keeps escaping me - why is the Libor-market model (LMM) assumed to e free of aritrage in continuous time ? To me this means ...
1
vote
2answers
122 views

Why doesn't Black-Scholes assume the absence of statistical arbitrage?

Both Black-Scholes and binomial model assume that there's no risk-free arbitrage in the market. But that sounds like a very weak condition. If a trading scheme makes you gain 100 dollars with 99% ...
1
vote
2answers
172 views

M&A hedging an equity portfolio against an index

Quick Note This question was already posted under the userID user8170. Reason being I could not access my account. Now I am able to login to my account I am reposting the question here and will ...
1
vote
3answers
287 views

Is this arbitrage?

Assume the stockprice as in the Black-Scholes model (Geometric Brownian Motion): $$S_t=S_0e^{(\mu-\sigma^2/2)\cdot t+\sigma W_t}$$ Wouldn't there be an immediate arbitrage opportunity, to just buy ...
1
vote
1answer
33 views

Risk-free arbitrage given a volume oracle?

Given a magical oracle who can correctly predict the volume, but not the price, of a given security, does there exist a risk-free arbitrage to capitalize on this information?
1
vote
2answers
108 views

Pricing Principle 1

In Tomas Björk's Arbitrage Theory in Continuous Time (or here), $\exists$ this Pricing Principle. Is the one in red supposed to be the proof of the Pricing Principle 1? Or merely an intuitive ...