All Questions
5
votes
2answers
219 views
How can one determine approximately what percentage of options trades are buyer-initiated vs. seller-initiated?
How can one determine approximately what percentage of options trades are buyer-initiated vs. seller-initiated? What measures of order flow are available specifically for options, preferably for ...
7
votes
1answer
120 views
How to handle coupon payments when pricing a bond with an embedded option?
I'm using a binomial tree to price a bond that has an embedded call or put option.
On every node that has a coupon payment, do you include the coupon payment then max/min out the value, or do you ...
7
votes
0answers
235 views
What are the major characteristics of natural gas volatility and options?
Seasonality is a big deal in the natural gas markets. My understanding is that they are broadly divided into summer and winter, with seasonality in both price and the volatility.
What does this ...
6
votes
2answers
207 views
Where can you find data on non-trading stocks?
My data source for end of day prices only gives the prices of the trades during the day. If a stock stops trading/goes out/moves to another exchange|changes symbol. I never hear about this.
My ...
19
votes
5answers
2k views
Why is an inverted yield curve a problem?
Immediately preceding the worst of the financial crisis, my professors all pointed out to me that the yield curve had inverted -- short-term yields were more risky than 20-year or 30-year Treasury ...
8
votes
1answer
35 views
What are useful indexes for rapid evaluation of country economic risk?
The World Economic Forum Global Competitiveness Report offers a comprehensive view of individual country risk/reward. There has been an explosion of these types of indexes over the past few years.
...
6
votes
2answers
240 views
What is the denominator in calculating daily range as a percentage?
Assume a stock had an open of \$100 and a close of \$102. If the high of the day was \$103 and the low was \$99, the daily range is obviously \$4. What is the best way to express the daily range in ...
6
votes
1answer
357 views
How to perform basic integrations with the Ito integral?
From the text book Quantitative Finance for Physicists: An Introduction (Academic Press Advanced Finance) I have this excercise:
Prove that
$$
...
9
votes
4answers
100 views
Are there any valuation models of securities that use hyperbolic discounting?
To quote Wikipedia:
In hyperbolic discounting, valuations fall very rapidly for small delay periods, but then fall slowly for longer delay periods. This contrasts with exponential discounting, in ...
11
votes
3answers
687 views
How to detect regime change when estimating asset correlation from historical time series?
Suppose I have two asset time series, $X_t$ and $Y_t$, and I'm estimating their correlation from historical data. I'd like to apply some systematic criterion to estimate what time window I should use ...
13
votes
2answers
144 views
How reliable is Benford's Law in forecasting crises?
I was recently reading an article about how financial accounting has increasingly deviated from the ratios expected by Benford's Law. (Benford's Law and Decreasing Reliability).
The author discusses ...
17
votes
4answers
129 views
What are the effects of turning a backed currency into a fiat currency?
I hear a lot of debate over the removal of the U.S. Dollar's precious metal backing and the subsequent inflation rates, but is there any proven relationship between unbacked currency and extreme ...
4
votes
2answers
152 views
How do earnings estimates respond to changes in underlying fundamentals and economic conditions?
Sell-side analysts' earnings estimates for individual companies, typically reported by I/B/E/S, are a key ingredient to many quantitative models. However, revisions to analyst estimates tend to lag ...
22
votes
1answer
1k views
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 ...
8
votes
3answers
420 views
Reference on Markov chain Monte Carlo method for option pricing?
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?
10
votes
2answers
586 views
How to forecast expected volatility from high-frequency equity panel data?
I'm wading through the vast sea of literature on realized volatility estimation and expected volatility forecasting (see, e.g. Realized Volatility by Andersen and Benzoni, which cites 120 other ...
1
vote
1answer
841 views
How to get started in quant finance? [closed]
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 ...
9
votes
3answers
820 views
How to optimally allocate capital among trading strategies?
I'm trying to find an optimal way to allocate capital among trading strategies.
"Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given ...
2
votes
0answers
366 views
How to Calculate Risk of Ruin [closed]
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 ...
7
votes
2answers
657 views
Why doesn't Black-Scholes work in discrete time?
I have a question considering Financial markets in discrete Time:
One of the main theorems in discrete time is:
In finite discrete Time with trading times t={1,...,T} the following are equivallent:
...
8
votes
1answer
820 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
182 views
What do we really mean by put-call ratio and how should it be expressed?
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 ...
7
votes
2answers
411 views
What is a reasonable upper bound on the performance of a daily trading strategy?
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 ...
5
votes
2answers
208 views
How to define and measure liquidity or funding premium in credit markets?
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 ...
4
votes
2answers
325 views
Choice of prior as a shrinkage target in portfolio construction?
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 ...
7
votes
1answer
371 views
What techniques are used for testing order book implementations?
I am finishing the implementation of a limit order book for modeling NASDAQ. The order book works off of the ITCH feed. My question is what techniques are typically used for testing order books. I am ...
10
votes
2answers
732 views
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 ...
-2
votes
2answers
184 views
How do I calculate expectancy from a past series of trades in my trading account? [closed]
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, ...
9
votes
1answer
383 views
Can VIX be interpreted as a proxy for instantaneous volatility?
BJO06 (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 + ...
10
votes
3answers
1k views
At what point does someone using technical analysis become a Quant?
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:
is Quantitative Finance a science, like ...
15
votes
5answers
2k views
Skew arbitrage: How can you realize the skewness of the underlying?
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.
Volatility arbitrage (or ...
11
votes
1answer
3k views
How to interpret the eigenmatrix from a Johansen cointegration test?
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 --> ...
13
votes
3answers
3k views
What is the best way to “fix” a covariance matrix that is not positive semi-definite?
I have a sample covariance matrix of S&P 500 security returns where the smallest k-th eigenvalues are negative and quite small (reflecting noise and some high correlations in the matrix).
I am ...
6
votes
1answer
1k views
How to estimate probability of default from bond prices?
How do you use bond prices/yields to infer probabilities of default? I would think of it as follows:
Create a relationship between default free (e.g., Germany) and defaultable (e.g., Greece) bond ...
7
votes
2answers
305 views
Fitting a generalized logistic distribution
I have a process that estimates the parameters for the following function using the NL2SOL algorithm.
$C-[\alpha+\frac{\beta-\alpha}{1+e^-\theta(y_t-\delta)} \vartriangle y_t]$
The process currently ...
7
votes
3answers
298 views
Is there data on market participants at a particular moment?
I am looking for data on market participants at a particular moment (or some proxy/approximation). For example, how can I tell whether mostly big players and HFTs are dominating the market in ...
8
votes
2answers
589 views
How does volatility affect the price of binary options?
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 ...
8
votes
3answers
712 views
What tools are used to numerically solve differential equations in Quantitative Finance?
There are a lot of Quantitative Finance models (e.g. Black-Scholes) which are formulated in terms of partial differential equations. What is a standard approach in Quantitative Finance to solve these ...
6
votes
2answers
600 views
Why is the SABR volatility model not good at pricing a constant maturity swap (CMS)?
I have heard that the SABR volatility model was not good at pricing a constant maturity swap (CMS). How is that?
17
votes
7answers
2k views
Excellent information source on advanced machine learning / data mining based trading?
I did check the related posts, like this one here.
However, given if one already has knowledge in finance, machine learning and statistics, and wants to know something more advanced on machine ...
6
votes
2answers
677 views
Is Duration really the slope of the Price-Yield curve?
When looking at the Price-vs-Yield graph for a fixed rate instrument, we are often told that the duration is the slope of that curve. But is that really right?
Duration is (change in price) divided ...
6
votes
2answers
452 views
optimal re-balancing strategy with asynchronous alpha signal
You want to construct an optimal portfolio.
Let's say you have an alpha signal that arrives with some period (say quarterly). The alpha signal predicts arithmetic returns one-year ahead. You have ...
6
votes
3answers
466 views
How to calculate compound returns of leveraged ETFs?
Forewarning: this is a complete newbie question :-)
I am starting to learn about ETFs by trying to do the numbers. When learning about the compounding effect in leveraged ETFs, I wanted to simulate ...
1
vote
0answers
217 views
Delta-Omega Hedging [closed]
I am currently trying to understand the in's and out's of options and more specifically hedging. I came across a document that was talking about Delta Hedging which is just making sure the delta of ...
13
votes
2answers
564 views
How do you distinguish “significant” moves from noise?
How do you distinguish between losses that are within the normal range for day-to-day shifts and situations with a real potential for loss? The specific application I have in mind is pattern ...
15
votes
5answers
2k views
Recommendations for books to understand the math in quantitative finance papers?
Can anyone recommend books that explain the math used in quantitative finance academic papers?
-2
votes
1answer
344 views
Way to download current stock information (for free)? [duplicate]
Possible Duplicate:
What data sources are available online?
Is there a free way to download the current prices (and possibly other data) for stocks for various companies?
Context: This is ...
11
votes
3answers
438 views
Empirical or theoretical quant insights that have shaped your thinking?
What are some quant theoretical or empirical insights that have shaped your thinking or provided a deeper conceptual basis for explaining returns and risk?
6
votes
1answer
229 views
How to build the short end of a zero coupon curve for non-core Eurozone countries?
I am in the process of building zero coupon curves for some countries in the Eurozone.
I have the following data sets:
Euribor and EONIA
Swap rates
Bond price and yields
The bond prices (and thus ...
6
votes
1answer
185 views
How to assign equity analyst recommendations to a common, numeric scale?
Yahoo finance conveniently provides historic ratings from a number of analysts. Unfortunately, each analyst seems to use a different scale: buy/hold/sell, perform/outperform/neutral, overweight/equal ...
