All Questions

16
votes
4answers
1k 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 ...
15
votes
3answers
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.
11
votes
2answers
775 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 ...
11
votes
3answers
5k views

Control for bid/ask bounce in high-frequency trade data?

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 ...
9
votes
7answers
6k 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, ...
18
votes
3answers
1k views

Tools in R for estimating time-varying copulas?

Are there libraries in R for estimating time-varying joint distributions via copulas? Hedibert Lopes has an excellent paper on the topic here. I know there is an existing packaged called copula but ...
15
votes
1answer
439 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 ...
15
votes
2answers
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 ...
12
votes
5answers
2k 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 ...
13
votes
2answers
668 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 ...
12
votes
2answers
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 ...
11
votes
3answers
3k views

Free intra-day equity data source

Are there any free data source for historical US equity data? Yahoo finance has daily prices but I'm looking for something more granular and goes back 2 or more years (doesn't have to be close to tick ...
9
votes
2answers
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 ...
13
votes
2answers
697 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 ...
12
votes
8answers
955 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 ...
9
votes
2answers
782 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 ...
5
votes
4answers
2k views

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 ...
4
votes
2answers
413 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 ...
25
votes
8answers
2k 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 ...
11
votes
4answers
806 views

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 ...
11
votes
3answers
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 ...
11
votes
5answers
2k 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? ...
10
votes
1answer
545 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 ...
9
votes
3answers
915 views

Implementing a Fast Fourier Transform for Option Pricing

So, I'm in need of some tips regarding a small project I'm doing. My goal is an implementation of a Fast Fourier Transform algorithm (FFT) which can be applied to the pricing of options. First ...
9
votes
3answers
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 ...
8
votes
3answers
1k 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 ...
8
votes
1answer
2k 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 ...
7
votes
6answers
524 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 ...
7
votes
4answers
1k views

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 ...
6
votes
5answers
672 views

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: ...
20
votes
4answers
2k views

QuantLib in industry

How much is QuantLib used in industry and how much street cred does it have?
15
votes
3answers
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 ...
14
votes
2answers
1k 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 ...
14
votes
3answers
1k views

Is there a way to estimate (predict) the half life of a quantitative trading system?

Usually even good performing quant trading strategies work for a while and then return start to shrink. I see two reasons for that which would probably give rise to different analysis: The Strategy ...
14
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 ...
12
votes
3answers
799 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 ...
10
votes
3answers
1k views

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 ...
8
votes
2answers
586 views

Minimizing Correlation

Is there a quantitative method in monitoring trades to reduce the possibility of correlated trades?
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. ...
6
votes
2answers
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 ...
6
votes
2answers
1k views

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 ...
5
votes
1answer
295 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 ...
5
votes
3answers
7k 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 ...
5
votes
2answers
1k views

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 ...
5
votes
3answers
596 views

How do you remove expected returns from asset allocation strategies?

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 ...
4
votes
6answers
27k views

How to calculate unsystematic risk?

We know that there are 2 types of risk which are systematic and unsystematic risk. Systematic risk can be estimate through the calculation of β in CAPM formula. But how can we estimate the ...
3
votes
1answer
373 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. ...
3
votes
4answers
588 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 ...
2
votes
2answers
6k views

What does it mean to be long gamma?

When you are "long gamma", your position will become "longer" as the price of the underlying asset increases and "shorter" as the underlying price decreases. source: ...
14
votes
2answers
799 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 ...

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