All Questions
13
votes
3answers
1k views
Is there any theoretical basis for pattern-recognition strategies?
Mean-reversion and trend-following strategies have some kind of a theory behind them that explains why they might work, if implemented well. Pattern-recognition, on the other hand, seems like nothing ...
13
votes
4answers
643 views
Approximately what proportion of a stock’s volatility is explained by market movement?
Assume we decompose the daily (log) returns of a stock as beta times market movement plus an idiosyncratic part. If this is done ex-ante, what proportion of the variance is explained by the market ...
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 ...
13
votes
5answers
3k views
Python library for Portfolio Optimization
Does anyone know of a python library/source that is able to calculate the traditional mean-variance portfolio? To press my luck, any resources where the library/source also contains functions such as ...
13
votes
2answers
2k views
What type of analysis is appropriate for assessing the performance time-series forecasts?
When using time-series analysis to forecast some type of value, what types of error analysis are worth considering when trying to determine which models are appropriate.
One of the big issues that ...
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 ...
13
votes
2answers
573 views
Duality between constant rebalanced portfolio (CRP) and corresponding derivative
One of the greatest achievements of modern option pricing theory is finding corresponding dynamical trading strategies in linear instruments with which you can replicate and by that price derivative ...
13
votes
1answer
1k views
Transformation from the Black-Scholes differential equation to the diffusion equation - and back
I know the derivation of the Black-Scholes differential equation and I understand (most of) the solution of the diffusion equation. What I am missing is the transformation from the Black-Scholes ...
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 ...
13
votes
3answers
3k views
Free market data (delayed or snapshot)
I know there are similar questions but I don't think there are any identical ones.
Basically, I'm looking for one of these two things.
Delayed market data feed. A tick by tick feed, but delayed by ...
13
votes
2answers
760 views
Is there a standard method for getting a continuous time series from futures data?
I would like to be able to analyse futures prices as one continuous time series, so what kinds of methods exist for combining the prices for the various delivery dates into a single time series?
I am ...
13
votes
2answers
571 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 $X_t$ ...
13
votes
1answer
362 views
What should be considered when selecting a windowing function when smoothing a time series?
If one wants to smooth a time series using a window function such as Hanning, Hamming, Blackman etc. what are the considerations for favouring any one window over another?
13
votes
1answer
529 views
Diversification, Rebalancing and Different Means
I have found many financial authors making generalizations about GM and AM but they are wrong in certain circumstances. Could someone explain their reasoning?
My fact why they are wrong is based ...
12
votes
5answers
3k views
What is the intuition behind cointegration?
What is the intuition behind cointegration? What does the Dickey-Fuller test do to test for it? Ideally, a non-technical explanation would be appreciated.
Say you need to explain it to an investor ...
12
votes
6answers
5k views
Is Scala used in trading systems
I'm curious about high performance computing and consider algo/program trading as an interesting source of information about what are performant technologies that are used to trade the markets.
Is ...
12
votes
8answers
3k views
How fast is QuickFix ?
In my firm we are beginning a new OMS (Order Management System) project and there is a debate whether we use Quickfix or we go for a professional fix engine? Because there is a common doubt that ...
12
votes
5answers
2k views
Proof that you cannot beat a random walk
There is much speculation to what degree financial series are random (and what kind of randomness prevails).
I want to turn the question on its head and ask:
Is there a mathematical proof that ...
12
votes
6answers
664 views
Setting the r in put-call parity?
Put-call parity is given by $C + Ke^{-r(T-t)} = P + S$.
The variables $C$, $P$ and $S$ are directly observable in the market place. $T-t$ follows by the contract specification.
The variable $r$ is ...
12
votes
6answers
2k views
What is the best data structure/implementation for representing a time series?
I was wondering what is best practice for representing elements in a time series, especially with large amounts of data. The focus/context is in a back testing engine and comparing multiple series.
...
12
votes
5answers
2k views
Is the stock price process a martingale or a Markov process?
Some people claim that the data-generating process for stocks is a "martingale" and that is has the "Markov property".
Are they unrelated? Is it that the Markov property implies some sort of ...
12
votes
5answers
906 views
is beta of a portfolio always meaningful?
Consider the following strategies:
a stat arb strategy with no overnight exposure, but significant market exposure intraday.
a market timing model which is always long or short the market.
etc
is ...
12
votes
4answers
762 views
HFT: What is the big differentiator in comparison to other time scales?
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 ...
12
votes
7answers
1k views
Why is there no “meta-model”?
If I design a trading model, I might want to know the model's half life. Unfortunately, it doesn't seem possible to predict alpha longevity without a meta-model of the market. Intuitively, such a ...
12
votes
4answers
1k views
Evaluating automated trading strategies: accepted practice
Both for private projects, and for clients, I've been working on code a lot this year to evaluate automated trading strategies. This often ends up turning into the task of how to fairly compare apples ...
12
votes
2answers
610 views
What are the limitations of Gaussian copulas in respect to pricing credit derivatives?
The practice of using Gaussian copulas in modeling credit derivatives has come under a lot of criticism in the past few years. What are the major arguments against using the copula method in this ...
12
votes
2answers
552 views
How do we use option price models (like Black-Scholes Model) to make money in practice?
In quantitative finance, we know we have a lot of option price models such as geometric Brownian motion model (Black-Scholes models), stochastic volatility model (Heston), jump diffusion models and so ...
12
votes
5answers
873 views
Why are options trades supposed to be delta-neutral?
I'm reading Natenberg's book, and he says that all options trades should be delta neutral.
I understand that this prevents small changes in the underlying price from changing the price of the option, ...
12
votes
4answers
1k views
Are two identical time series cointegrated?
I did cointegration test on two identical time series, and the result shows that they are not cointegrated, but intuitively, I think they are.
Can anyone share some thoughts on this? Thanks!
12
votes
3answers
1k views
How to encode trading strategies mathematically
If you have a bunch of different econometric data (e.g. indexes, FX,
commodities, interest rates...) you can try to find a formula to see
if there is any relationship in the data - e.g. to forecast ...
12
votes
3answers
602 views
How to account for transaction costs in a simulated market environment?
I am simulating a market for my trading system. I have no ask-bid prices in my dataset and use adjusted close for both buy and sell price. To account for this I plan to use a relative transaction ...
12
votes
2answers
417 views
Can you fully hedge an option in the presence of counterparty risk?
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 ...
12
votes
3answers
859 views
Does mean-variance portfolio optimization provide a real edge to those who use it?
Mean-variance optimization (MVO) is a 50+ year concept, and perhaps the first seminal idea of quantitative finance. Still, as far as I know, less than 25% of AUM in the US is quantitatively managed. ...
12
votes
3answers
2k views
What are the best sources for equity quantitative research?
What are the best sources of quantitative finance research in equities?
I will list a couple and note an asterisk if the research is available by request (i.e. non-clients) or online:
BAC-Merrill ...
12
votes
3answers
459 views
How to price a volatility-index option?
There exist several volatility indices, such as the CBOE Volatility Index (VIX). There are also options on such indicies.
What is the best way to price a volatility-index option? Is there a simple ...
12
votes
2answers
547 views
Concentration risk in credit portfolio
How do you model concentration risk of credit portfolio in IRB/Basel II framework?
12
votes
3answers
624 views
Discrete-time model: stock dynamics
I am working in the area of probability theory and for a case study I would like to make some calculations in finance. Since I am developing theory for the discrete time, I am interested in models for ...
12
votes
2answers
384 views
Variable Selection in factor models
Let's say you have a dependent variable and many independent variables. What are the preferred metrics for sorting and selecting variables based on explanatory power? Let's say you are not concerned ...
12
votes
2answers
971 views
Is there an open source alternative to Reuters Kondor+?
Basically, I'm looking for a system which have trading(in a demo account), book keeping, profit/loss and risk calculation capability across different asset classes such as bond, repo, equity, foreign ...
12
votes
2answers
1k views
statistical arbitrage option overlay strategies / volatility trading
Here's an interesting trading puzzle that I would love to get the community's input on.
Let's say there exists an alpha signal that does a good job of sorting equities expected excess returns over ...
12
votes
1answer
362 views
What time are Bloomberg Open Symbology Files updated daily?
Does anyone know what time the Bloomberg Open Symbology precanned files are updated every day? I am planning on upating my view of them at 9 AM EST every morning. Furthermore, will the files for ...
12
votes
0answers
1k 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 ...
11
votes
6answers
1k views
Why does the VIX index have *any* correlation to the market?
It appears that the log 'returns' of the VIX index have a (negative) correlation to the log 'returns' of e.g. the S&P 500 index. The r-squared is on the order of 0.7. I thought VIX was supposed to ...
11
votes
3answers
1k views
What methods do you use to improve expected return estimates when constructing a portfolio in a mean-variance framework?
One of the main problems when trying to apply mean-variance portfolio optimization in practice is its high input sensitivity. As can be seen in (Chopra, 1993) using historical values to estimate ...
11
votes
4answers
5k views
Why are GARCH models used to forecast volatility if residuals are often correlated?
The answers to this question on forecast assessment suggest that if the sequence of residuals from the forecast are not properly independent, then the model is missing something and further changes ...
11
votes
3answers
739 views
How do strategies deal with corporate actions?
There are many corporate actions that will affect the stock price, like dividend, stock split and rights.
Given a large series of historical price data, how do we adjust the data to filter out the ...
11
votes
2answers
2k views
How do I find the most diversified portfolio, or least correlated subset, of stocks?
I have a trading system that chooses top 10 stocks in Nasdaq 100 ranked on relative strength and some other factors. However, I'd like to take positions in only 5 of these 10 stocks based on how ...
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?
11
votes
2answers
478 views
Transparent quant products with real track record
A real track record is better than backtesting! I am looking for
products, funds, certificates, indices etc. that are based on
quantitative trading strategies where the
strategies and performance ...
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 ...
