17
votes
5answers
5k 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 ...
17
votes
5answers
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 ...
12
votes
3answers
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?
19
votes
3answers
3k 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 ...
11
votes
5answers
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 ...
32
votes
9answers
4k 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 ...
17
votes
8answers
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 ...
20
votes
3answers
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 ...
17
votes
2answers
663 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
5answers
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 / ...
14
votes
5answers
6k 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 ...
17
votes
2answers
892 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 ...
16
votes
3answers
4k 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.
12
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 ...
12
votes
2answers
774 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: $$\frac {mean(HIGH-LOW)}{mean(|CLOSE-OPEN|)}$$ ...
8
votes
3answers
574 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 ...
13
votes
2answers
1k 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 ...
12
votes
2answers
3k 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 ...
12
votes
3answers
6k 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 ...
11
votes
4answers
4k 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 ...
11
votes
1answer
5k views

What is the best live options data API?

What is the best/cheapest service to get real-time (as real-time as you can get) on stock options? I'm looking for the fastest update on the ENTIRE market, with a few stocks prioritized, so I need ...
21
votes
6answers
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 ...
17
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 ...
16
votes
2answers
742 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 ...
14
votes
2answers
2k 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
2answers
1k 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 ...
9
votes
1answer
2k views

How do I reproduce the cross-sectional regression in “Intraday Patterns in the Cross-section of Stock Returns”?

Recently I was trying to reproduce the results of "Intraday Patterns in the Cross-section of Stock Returns" (published in the Journal of Finance 2010). The authors used cross-sectional regression to ...
8
votes
2answers
4k 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 ...
7
votes
6answers
1k 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
6answers
3k 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 ...
3
votes
1answer
7k views

Where can I find some examples of high frequency or stat arb trading algorithms beyond basic textbook pairs trading?

In particular, http://en.wikipedia.org/wiki/Algorithmic_trading#Algorithms has several name algorithms. I understand most HFT algorithms are proprietary but I am looking for examples of HFT ...
13
votes
4answers
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 ...
11
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 ...
11
votes
5answers
7k 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?
10
votes
2answers
3k 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 ...
8
votes
1answer
2k views

What are the steps to perform properly a risk factor analysis on a portfolio?

I have been asked to perform a factor analysis on a given portfolio, assume it's a Swiss portfolio in CHF. First step, I chose which factors I would like to see in my analysis. The first factors I ...
8
votes
9answers
57k 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 ...
7
votes
6answers
14k views

How to calculate stock move probability based on option implied volatility and time to expiration? (Monte Carlo simulation)

I am looking for one line formula ideally in Excel to calculate stock move probability based on option implied volatility and time to expiration? I have already found a few complex samples which took ...
7
votes
4answers
5k views

Analyzing tick data

What are some of the commonly used techniques to analyze tick data? I am looking at tick data to see how the quotes/ mid-price evolves due to certain events in the market. Since tick data is ...
6
votes
1answer
473 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 ...
6
votes
3answers
734 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 ...
5
votes
1answer
1k views

Automated 10-K XBRL data grab using the SEC file structure

I would like to write a program that takes as input a list of CIK/year/quarter entries. The program should iterate through the list and, for each entry, grab XBRL financial data from the SEC website ...
19
votes
3answers
3k 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
809 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
739 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 ...
13
votes
8answers
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 ...
12
votes
4answers
1k 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 ...
12
votes
2answers
5k 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?
9
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 ...
7
votes
2answers
1k views

Recommendation for a library to calculate the local volatility surface?

I'd like a library to calculate the options local volatility surface, i.e. the options implied volatility surface for a collection of strikes and their bid/ask prices. Here are the libraries I've ...

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