# All Questions

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### What is the ideal ratio of in-sample length to out-of-sample length?

Suppose you are running a portfolio of quantitative strategies and that you develop a new potential strategy to be added to the mix. Assume for simplicity that the new strategy is independent of the ...
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### Why Drifts are not in the Black Scholes Formula

This question has puzzled me for a while. We all know geometric brownian motions have drifts $\mu$: $dS / S = \mu dt + \sigma dW$ and different stocks have different drifts of $\mu$. Why would ...
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### 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 ...
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### 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 ...
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### 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 ...
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### 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 ...
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### Resources for finding scholarly research on topics in quantitative finance?

A friend and I have taken up an interest in quantitative finance, and we're pretty much starting from scratch—neither of us have backgrounds in finance, but rather electrical engineering and ...
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### Why do expected return models and risk models use different factors?

This is a question responding to weekly topic challenge. I happen to see an interesting question from SYMMYS by Michael Kapler. I always approached expected return and risk modeling as separate ...
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### Hedging stocks with VIX futures

It seems that VIX futures could be a great hedge for a long-only stock portfolio since they rise when stocks fall. But how many VIX futures should I buy to hedge my portfolio, and which futures ...
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### Multilayer Perceptron (Neural Network) for Time Series Prediction

I have it in mind to build a Multilayer Perceptron for predicting financial time series. I understand the algorithm concepts (linear combiner, activation function, etc). But while trying to build the ...
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### What is an efficient data structure to model order book?

What is an efficient data structure to model order book of prices and quantities to ensure: constant look up iteration in order of prices retrieving best bid and ask in constant time fast quantity ...
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### What approaches are there to order handling in automated trading?

I am currently developing a commercial automated trading program in which users can write their own proprietary code and develop strategies, like in NinjaTrader, MetaTrader etc. Right now I am working ...
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### 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. ...
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### How to build a mean reverting basket?

I have been playing with mean reverting pairs, but seems that most of the low hanging fruit (ie pairs) have been squeezed already. I would like to start with mean reverting baskets (>2 securities) in ...
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### Which algorithm should I look into to kick off my research in algorithmic trading? [closed]

I have recently undertaken a research into automated algorithmic trading algorithms. The aim of the research is to focus on studying algorithmic trading and trying to improve a basic implementation ...
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### Indicators and research for stress-based investment strategies

In reference to this paper: Can risk aversion indicators anticipate ﬁnancial crises? and the investable UBS Risk Adjusted Dynamic Alpha Strategy: ...
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### Constructing an approximation of the S&P 500 volatility smile with publicly available data

Besides of the VIX there is another vol datum publicly available for the S&P 500: the SKEW. Do you know a procedure with which one can extrapolate other implied vols of the S&P 500 smile with ...
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The classic mean-variance optimization problem tries to minimize variance of a portfolio for a given expected return: $$\underset{w}{\arg \min} \quad w^T \Sigma w \quad \text{s.t} \quad \mu^Tw \geq ... 3answers 4k views ### Are public historical time series available for ratings of sovereign debt? The nice list of free online data sources Data sources online does not mention any data from ratings agencies. Are historical time series available for sovereign credit ratings (other than as ... 4answers 548 views ### Do markets typically fall fast, and rise slowly I'm wondering if there is some measurement or name to this notion, i.e.: Markets typically fall fast, but rise slowly. It seems like this is the case -- get some bad news out of Europe on the debt ... 1answer 338 views ### Malliavin Calculus From a quant point of view, how would you explain Malliavin calculus in few words ? I have the level to take these courses, but won't be able to do it next year, so I want to know what I am missing. ... 4answers 2k views ### QuantLib in industry How much is QuantLib used in industry and how much street cred does it have? 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 ... 3answers 7k views ### Correlation between prices or returns? If you are interested in determining whether there is a correlation between the Federal Reserve Balance Sheet and PPI, would you calculate the correlation between values (prices) or period-to-period ... 1answer 285 views ### What approaches are there for stress testing a portfolio? Wikipedia lists three of them: Extreme event: hypothesize the portfolio's return given the recurrence of a historical event. Current positions and risk exposures are combined with the historical ... 8answers 4k views ### Why does implied volatility show an inverse relation with strike price when examining option chains? When looking at option chains, I often notice that the (broker calculated) implied volatility has an inverse relation to the strike price. This seems true both for calls and puts. As a current ... 2answers 2k views ### Why do we use GARCH(1,1) to predict volatility? What makes GARCH(1,1) so prevalent in modeling especially in academia? What does this model has that is significantly better than the others? 2answers 525 views ### Minimizing Correlation Is there a quantitative method in monitoring trades to reduce the possibility of correlated trades? 1answer 913 views ### A generic limit order book: What are the most important queries it should be able to answer? Assume a class LimitOrderBook which represents a limit order book in a trading system. To be able to represent the limit order book a data handler reads a feed ... 4answers 2k views ### How to get greeks using Monte-Carlo for arbitrary option? Let's assume I have an arbitrary option that I can price using Monte-Carlo simulation. What is the general approach (i.e. without relying on specific option type) to calculating the greeks in this ... 7answers 1k views ### Recommendation for a book on CVA/Credit Risk and PD/LGD/EAD modeling? I need suggestions for some good books on the following topics: Credit Value Adjustment (CVA) / Credit Risk Probability of Default / Loss-Given-Default / Exposure-At-Default modeling Any pointers ... 2answers 919 views ### Mass Market Data Source My current project requires large amounts of historical and real-time market data (1m or 5m bars for various products, mostly US futures for as far back as available). This data will be analyzed by ... 2answers 4k views ### How to fit ARMA+GARCH Model In R? I am currently working on ARMA+GARCH model using R. I am looking out for example which explain step by step explanation for fitting this model in R. I have time series which is stationary and I am ... 3answers 1k views ### How much capital do I need to create a competitive automated trading strategy? I'm a relatively small investor, and I'm interested in building my own fully-automated quantitative trading strategy. I also read about dark pools, and how difficult it is to get good prices on ... 1answer 6k views ### How to interpret results of Johansen Test? I have two time-series a & b. The objective is to find out whether two series are cointegrated or not. I am using Johansen Test in R to find this out. I am using urca package of R. Here is the ... 3answers 1k views ### How to detect and adjust for stock splits? [duplicate] I am using a large daily data panel for over 250 companies and over several years. I am concerned about adjusting for stock splits. Is there any program in SAS to detect stock splits? How do I adjust ... 6answers 14k views ### What's the difference between volatility and variance? How do they differ in what they imply about an underlying's (or any variable's) movement? 2answers 606 views ### Parameter estimation of Ornstein–Uhlenbeck and CIR processes I would like to estimate Ornstein–Uhlenbeck process' parameters via Kalman filter. My process is the following one: \text{d}x_{t}=\alpha(\theta-x_{t})\text{d}t+\sigma\text{d}W_{t} I'm interested ... 5answers 1k 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 ... 2answers 4k views ### Cross Currency Swap Pricing in nowadays environment Multicurve setting has now become the new paradigm for vanilla swap valuation. For the record I give here (without getting into too much details) the methodoloy for pricing Euribor3M swaps in this ... 4answers 2k views ### What is a “coherent” risk measure? What is a coherent risk measure, and why do we care? Can you give a simple example of a coherent risk measure as opposed to a non-coherent one, and the problems that a coherent measure addresses in ... 4answers 3k views ### What is a martingale? What is a martingale and how it compares with a random walk in the context of the Efficient Market Hypothesis? 4answers 563 views ### Is this a common variation of sharpe ratio? As an aside on his answer on another question Freddy said: Sharpe ratio is an often cited metric, though I do not like it too much because you are penalized for out-sized positive returns while ... 3answers 1k 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 ... 3answers 886 views ### How to estimate real-world probabilities In the world of finance, Risk-neutral pricing allow us to estimate the fair value of derivatives using the risk free rate as the expected return of the underlyings. However, the behavior of ... 2answers 2k views ### Are there comprehensive analyses of theta decay in weekly options? Are there comprehensive analyses of how much theta a weekly options loses in a day, per day? I know what the shape of theta decay looks like, in theory, where the decay towards zero happens more ... 1answer 342 views ### What is exactly Euler's decomposition? I have often seen the following statement in different paper: As \sigma is homogeneous and of degree 1, we use Euler decomposition and write \sigma(x)=\sum_{i=1}^n x_i \frac{\partial ... 2answers 1k views ### What is the mean and the standard deviation for Geometric Ornstein-Uhlenbeck Process? I am uncertain as to how to calculate the mean and variance of the following Geometric Ornstein-Uhlenbeck process.$$d X(t) = a ( L - X_t ) dt + V X_t dW_t Is anyone able to calculate the mean ...
My question: How can I compare the Resampled Frontier (REF) to the standard MVO frontier when I have been provided with $\mu$, $\Omega$, and don't have access to true future data to test real out of ...