# All Questions

16k views

### Strategy of Renaissance Technologies Medallion fund: Holy Grail or next Madoff?

Renaissance Technologies Medallion fund is one of the most successful hedge funds - ever! Yet it is very secretive. Do you have information on the strategy used that is not yet mentioned in the ...
11k views

### Is there any thing out there as a substitute for KDB?

thanks a lot for your discussions on the original post. following your suggestions, let me re-phrase a bit : kdb is known for its efficiency, and such efficiency comes at a terrible price. However, ...
1k views

### How to quickly estimate a lower bound on correlation for a large number of stocks?

I would like to find stock pairs that exhibit low correlation. If the correlation between A and B is 0.9 and the correlation between A and C is 0.9 is there a minimum possible correlation for B and C? ...
3k 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 ...
2k views

### How to forecast volatility using high-frequency data?

There is a large literature covering volatility forecasts with high-frequency tick data. Much of this has surrounded the concept of "realized volatility", such as: "Realized Volatility and ...
4k 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 ...
2k views

### Categories of systematic trading strategies?

What are the main categories of systematic trading strategies (e.g. momentum, mean reversion), as might be considered by an index or fund-of-fund analyst? Are there any common sub-strategies?
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 ...
3k views

### What are the best Journals & Conferences in Quantitative Finance?

What are some of the most prominent journals, conferences and publishing venues in Quantitative Finance research? Where can I find information more information about them? (e.g. impact factor and ...
2k views

### How can I quantitatively test the validity of momentum indicators?

I am learning about quantitative finance, and I am struck by how different it is from the techniques that make it into magazines and TV, particularly technical analysis. Specifically, if they say an ...
585 views

### Measuring Behavioral Finance Effects in Fund/Portfolio Manager Analysis

I want to know if there are some standardized measures to evaluate how irrationally human a portfolio manager is. Are there any performance measures or scorings for behavioral finance effects? How ...
2k views

### How do I adjust a correlation matrix whose elements are generated from different market regimes?

Say I want to calculate a correlation matrix for 50 stocks using 3-year historical daily data. And there are some stocks that were recently listed for one year. This is not technically challenging ...
1k views

### How to estimate the probability of drawdown / ruin?

A fairly naive approach to estimate the probability of drawdown / ruin is to calculate the probabilities of all the permutations of your sample returns, keeping track of those that hit your drawdown / ...
4k views

### portfolio optimisation with VaR (or CVaR) constraints

I would like to optimize a portfolio allocation (maximizing the exposure or the expected return), but with VaR or CVaR contraints. (some parts of my portfolio cannot exceed a certain VaR) How can I ...
499 views

### Please give a step-by-step explanation on how to build a factor model

Factor models such as Fama-French or the other ones that are partially summarized here work on the cross-section of asset returns. How are the factors built, how are sensitivities/coefficients ...
4k views

### Applications of Fourier theory in trading

What are fashionable applications of Fourier analysis in trading? I have heard vague ideas of applications in High Frequency Trading but can somebody provide an example, maybe a reference? Just for ...
3k views

### Option pricing before Black-Scholes

According to the Wikipedia article, Contracts similar to options are believed to have been used since ancient times. In London, puts and "refusals" (calls) first became well-known trading ...
3k views

### Main backtesting & trading solutions: QuantFactory, Deltix, etc.

What are the most used/mature/promising commercial solutions today which handle backtesting/ automated trading needs? I'm talking about vertical product suites like QuantFactory or Deltix which ...
821 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 ...
22k views

### How to annualize Sharpe Ratio?

I have a basic question about annualized Sharpe Ratio Calculation: if I know the daily return of my portfolio, the thing I need to do is multiply the Sharpe Ratio by $\sqrt{252}$ to have it ...
3k views

### Can the concept of entropy be applied to financial time series?

I am not familiar with the concept of entropy for time series. I am looking for good reference papers and examples of use.
710 views

### Why is the ratio of Hi-Low range to Open-Close range close to 2?

I tried it in several symbols and timeframes with the same result: $$\frac {mean(HIGH-LOW)}{mean(|CLOSE-OPEN|)}$$ ...
528 views

### How to test for and how to simulate price rise/fall asymmetry in the stock market

One of the stylized facts of financial time series seems to be a fundamental asymmetry between smooth upward movements over longer periods of time followed by abrupt declines over relatively shorter ...
873 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 ...
6k views

The bid-ask bounce is the bouncing of trade prices between the bid and ask sides of the market. It introduces a systematic bias to the data which can cause serious problems in analysis. What methods ...
1k views

### Why do some anomalies persist while others fade away?

In their 1990 book, A Non-Random Walk Down Wall Street, Andrew Lo and Craig MacKinlay document a number of persistent predictable patterns in stock prices. One of these "anomalies" is variously known ...
1k views

### How to execute a large futures order?

I am currently trading futures products on some contracts that have low volumes. More accurately, the volumes of working orders in the book are fairly light. I am trying to execute a relatively large ...
708 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 ...
3k views

### 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 ...
1k views

### Cleansing covariance matrices via Random matrix theory

I am exploring de-noising and cleansing of covariance matrices via Random Matrix Theory. RMT is a competitor to shrinkage methods of covariance estimation. There are various methods expressed usually ...
1k 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 ...
14k views

### How to simulate stock prices with a Geometric Brownian Motion?

I want to simulate stock price paths with different stochastic processes. I started with the famous geometric brownian motion. I simulated the values with the following formula: ...
2k views

### 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 ...
3k views

### Should Sharpe ratio be computed using log returns or relative returns?

I am trying to reconcile some research with some published values of 'Sharpe ratio', and would like to know the 'standard' method for computing the same: Based on daily returns? Monthly? Weekly? ...
2k views

### How can I learn about the quantitative aspects of market making in illiquid single stock options?

I would like to learn more about the possible ways of doing quantitative research regarding option market making. In particular, while the mainstream index option market may be very liquid, the ...
3k views

### 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 ...
934 views

### Self-financing and Black-Scholes-Merton formula

Self-financing is an important concept in financial product replicating, normally used in pricing. I read about several ways to derive Black-Scholes-Merton (BSM) formula. Seems some approaches ...
379 views

### Min VaR and Min TE as second order cone program

The quadratic optimization (min variance) $$w^{T} \Sigma w \rightarrow \text{min},$$ where $w$ is the vector of portfolio weights and $\Sigma$ is the covariance matrix of asset returns, is a well ...
2k 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 ...
767 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 ...
1k views

### Measuring liquidity

While liquidity is one of the key figure of financial markets, It seems to be very difficult to measure. Volume is sometime used as a proxy but can sometimes be completly irrelevant. Could you point ...
2k views

### Modelling with negative interest rates

For a project, I am interested to model the impact of recently negative interest bonds on the portfolio. The literature on modelling negative interest rates is limited, and the only theory I could ...
646 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 ...
2k views

### 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 ...
964 views

### What is the relationship between risk aversion and preference for skewness and kurtosis in portfolio optimization?

Is there any relationship between the risk aversion coefficient in an individual's utility function (commonly used in portfolio optimization) and the preference for higher moments such as skewness and ...
2k views

### Book on market microstructure

Can I get some recommendations for a book on market microstructure? I'm not looking for some author's questionable methods for trading, I'm just looking for a book that provides me with facts about ...
439 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 ...
24k views

### What is the difference between volatility and variance?

How do volatility and variance differ in finance and what do both imply about the movement of an underlying?