# All Questions

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### Order submission strategies of a rational market maker?

Consider a market maker that has decided to try to make a round-trip trade in stock A in order to capture the bid-ask spread. Assume furthermore that he has no current inventory in the stock A. To ...
553 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 ...
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### 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?
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### 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!
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### What are some quantitative approaches to value investment?

As a developer and statistician, I consider value investing to be a statistically sound investment strategy. I've read a few books on the area but I am still not clear on valuation measures. So I ...
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### How to combine multiple trading algorithms?

Is it possible to combine different algorithms so as to improve trading performance? In particular, I have read that social media sentiment tracking, digital signal processing and neural networks all ...
563 views

### How credible is Knight pointing the finger at Rule 107C?

After the Knight Capital incident, I decided to read into the new Rule 107C that NYSE pushed-out August 1st for a one-year pilot. From what I've read, Knight claims that new code rolled out for this ...
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### What is the most effective way of determining & measuring the level of HFT activity in a stock in (close to) real time?

On a security by security basis, I want to be able to quantify the level of HFT activity (and later institutional & retail activity). Is it higher than it normally is? How much so? What would you ...
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### Skewness and Kurtosis under aggregation

Returns possess non-zero skewness and excess kurtosis. If these assets are temporally aggregated both will disappear due to the law of large numbers. To be exact, if we assume IID returns skewness ...
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### Issues when considering a quantitative trading/finance firm

I have an upcoming quantitative trading interview (prop desk at a large bank), and I would like to have some good questions to ask about the group. However, I am changing fields from academia and I do ...
840 views

### Operating parameters of market makers?

I'd like to get a feel for the operating parameters of official market makers. I'm looking more for discerning characteristics, rather than exact numbers or an exhaustive list of each MM. Examples: ...
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### Effective Euro-USD (EURUSD) Exchange Rate Prior to Euro's Existence

Motivation: I am running a quantitative analysis that requires long-term, exchange rate data. Problem: Does anyone have methods for dealing with the EURUSD exchange rate prior to the Euro's existence?...
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### R: Fast and efficient way of running a multivariate regression across a (really) large panel (First pass of Fama MacBeth)

I am attempting to run a rolling multivariate regression (14 explanatory variables) across a panel of 5000 stocks: For each of the 5000 stocks, I run 284 regressions (by rolling over my sample ...
766 views

### What are some research articles on using principle components to generate alpha?

Here's an example by Marco Avellenada from NYU titled "Statistical Arbitrage in the U.S. Equities Market". The idea of this paper involves capturing mean reversion in the residual returns of a ...
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I am currently doing my research for my master thesis, which will clearly focus on the question of risk managment in algorithmic trading systems. I have done research about this topic and found some ...
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### Can you replicate an option on an arbitrary basket of stocks?

Since a market index is nothing more than a basket of stocks, you can create your own index by putting together stocks of your choice. The only difference is that you can trade options on major ...
739 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 ...
924 views

### How does UBS hedge its exposure to XVIX ETN?

I am wondering how UBS hedges its exposure to its ETN XVIX. Unless I am grossly overestimating the trading costs, executing the strategy they describe in their prospectus with futures would be quite ...
754 views

### Missing step in stock price movement equations

Assuming a naive stochastic process for modelling movements in stock prices we have: $dS = \mu S dt + \sigma S \sqrt{dt}$ where S = Stock Price, t = time, mu is a drift constant and sigma is a ...
2k views

### Topological methods in finance

Recently a promising start-up (Ayasdi) has made headlines. They are a spin-off of the Applied and Computational Algebraic Topology group of Stanford University (ComTop). What they basically do is ...
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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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### Meta-view of different time-series similarity measures?

While I spend most of my StackExchange time on MathematicaSE, I'm in the business and follow the questions and answers on this site with great interest. Recently questions like the following (and ...
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### Drawbacks & Caveats of using (N)Esper for ESP/CEP in trading systems?

Esper and its .NET port NEsper are components that enable Complex Event Processing (CEP) and Event Stream Processing (ESP) engines. They are especially suitable for trading applications. They can, ...
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### How to calculate future distribution of price using volatility?

I want to create a lognormal distribution of future stock prices. Using a monte carlo simulation I came up with the standard deviation as being $\sqrt{(days/252)}$ $*volatility*mean*$ $\log(mean)$. ...
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 ...
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### Has any research used Bayesian networks to estimate risk factor betas?

Is there any published research on estimating the beta of a security with respect to one or more risk factors via Bayesian networks? I'd like to see if this is a promising angle of research.
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### Is QuantLib more trouble than it's worth?

I'm just starting to work with QuantLib and wonder if I'm going down a very wrong path. I'm working on a site that presents the visitor with a table of streamed real-time options data, including ...
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### Value-at-Risk of the sum of two dependent lognormal random variables

Hy I posted this question first at mathflow.net they suggested me this page, which I was not aware of. Question: Let $(X_1,X_2)$ be a multivariate normal random vector ($X_1$ and $X_2$ need not be ...
272 views

### How do you characterize dividends for equity options?

While many systems like to treat dividends as a continuous yield when pricing equity options, it works quite poorly for short-dated options. In the short run, deterministic dividends are clearly the ...
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### Applicability of PCA to get historical volatilities to calibrate interest rates trees

My question in short is as follows: can I take main principal component of historical covariance matrix and use it as historical volatilities when fitting a binomial tree? Here's more detailed ...
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### 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 ...
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### Any recommendations for textbooks for an undergraduate course in mathematical finance? [closed]

I'll teach an introductory course on mathematical finance in the near future. The course is intended to entertain and broaden some well-prepared advanced undergrad mathematics majors, some physics ...
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### Comparing backtesting returns with real trading returns

I have 10 years of backtested simulated performance of some trading strategy (using historical prices), and N months of actual trading performance. What statistical test can I do find out if I'm on ...
541 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 ...
435 views

### Consistency of economic scenarios in nested stochastics simulation

I am interested in references on research regarding the consistency of economic scenarios in nested stochastics for risk measurement. Background: Pricing by Monte-Carlo: For pricing complex ...
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### Where can I find a database of ALL ETFs, sorted by age?

I have a portfolio allocation strategy I want to backtest, but I need a large "universe" of ETFs for it to choose from at each time period. I was thinking of starting with a criteria such as "all ...
678 views

### Models crumbling down due to negative (nominal) interest rates

Given that the negative interest rates on a lot of sovereign bonds with maturity under 10 years are trading in the negative (nominal) interest rate territory (recently also the short term EURIBOR has ...
265 views

### Extreme Value Theory possible for portfolios with options?

Say you have a portfolio with long exposure to a few linear assets (stock indices) and short exposure to a nonlinear asset (say call options on one of the linear assets). I am interested in ...
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?
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### Keeping a track record honest

I want to start a blog/newsletter and maintain a track record of trades I recommend. I have a never-expiring demo account for this purpose. How do I keep this track record "honest"? Three months ...
17k views

### How to calculate historical intraday volatility?

Sorry for what must be a beginner question, but when I went to write code I realized I didn't understand exactly how historical volatility, or statistical volatility, is defined. Wikipedia tells me "...
6k views

### What is Ito's lemma used for in quantitative finance?

Further to my question asked here: prior post and which left some points unanswered, I have reformulated the question as follows: What is Ito's lemma used for in quantitative finance? and when is it ...
3k views

### Why is the Drawdown measure not used for portfolio optimization?

I was asked yesterday by a colleague why we are doing asset allocation using optimizers which target, for a minimum expected return: the portfolio with the minimum variance or the portfolio with ...
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### Is it possible to use a series of option prices to predict the most likely path of an asset?

I've always wondered about this. If you have a series of options, with the expires spaced let's say one week between them, and you search for each expiration date the option with the smallest premium,...
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### What benefits are there to employing agile software development methodologies for quants?

Perusing the other SE network sites, particularly Programmers, I often find vigorous support for various agile software development methodologies, particularly the various values known as Extreme ...
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### 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 ...
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### What is a Quant

In the interest of having "canonical questions" on this site ... What is a Quant?
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### Why would an investor trade a variance swap over a volatility swap?

Why would an investor trade a variance swap over a volatility swap? Is it simply related to the leverage involved in a Var (i.e. sigma-squared) or is there something else to it?