All Questions

7
votes
2answers
2k views

robust portfolio optimization re-balancing with transaction costs

The optimal re-balancing strategy takes account of factors including i) objective function, ii) current portfolio weights, iii) expected return vector containing updated views/alpha forecasts, iv) ...
30
votes
6answers
5k views

Which approach dominates? Mathematical modeling or data mining?

According to my current understanding, there is a clear difference between data mining and mathematical modeling. Data mining methods treat systems (e.g., financial markets) as a "black box". The ...
9
votes
5answers
7k views

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?
9
votes
3answers
5k views

How should I calculate the implied volatility of an American option in a real-time production environment?

There are many models available for calculating the implied volatility of an American option. The most popular method, employed by OptionMetrics and others, is probably the Cox-Ross-Rubinstein model. ...
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 ...
5
votes
5answers
2k views

What are the advantages of switching platforms/languages between strategy development and implementation?

I am interested in coding a medium frequency (trading over minutes to hours, holding for days to weeks) quantitative trading strategy and trading it with Interactive Brokers. I have seen many people ...
4
votes
1answer
408 views

How to model the risk of a CFD

I'm struggling to understand why the risk on an equity CFD is not the same as for the corresponding equity. The RiskMetrics FAQ mentions two ways to model a CFD, but it does not explain why this is ...
6
votes
1answer
559 views

How to calculate equivalent futures position?

Let's say I have the following two positions: Buy ATM SPX call, expires in 1 month Sell ATM SPX put, expires in 1 month This creates a synthetic futures position. How do I calculate how many ...
8
votes
2answers
2k views

How we can forecast stock prices using chaos theory?

I saw an article in which the writer had mentioned that he used chaos theory to predict stock prices and ended up with a profit over 30%. Chaos theory is basically about finding patterns called ...
6
votes
2answers
412 views

Efficiency vs. Robustness - To use a constant or not in single factor time-series regression?

Arbitrage pricing theory states that expected returns for a security are linear combination of exposures to risk factors and the returns on these risk factors. Betas, or the exposures of the security ...
4
votes
1answer
3k views

How to replicate a digital call option

Call Option S=100 K=100 Payoff=1 (option is not available) How can i replicate this (payoff) with calls and puts with strike prices with multiples of 5$ Thanks for help
15
votes
5answers
4k views

Free paper trading site with an API

I've got a quanitative trading model I want to test out in the real stock market. Right now, I'm writing some code to pull "live" quotes from yahoo, feed them to my model, and keep track of the ...
-3
votes
2answers
736 views

Market Data For Project

I'm looking to find a service that will allow me to download historical data on stocks, bonds, options, futures, indices, etc and also to pick up new files either on a daily or weekly basis. I've been ...
7
votes
2answers
312 views

Obtaining characteristics of stochastic model solution

I want to use the following stochastic model $$\frac{\mathrm{d}S_{t}}{ S_{t}} = k(\theta - \ln S_{t}) \mathrm{d}t + \sigma\mathrm{d}W_{t}\quad (1)$$ using the change in variable $Z_t=ln(S_t)$ we ...
6
votes
2answers
204 views

Reference material about Quantified Asset Allocation?

I am looking for papers that would describe asset allocation with geometry, group theory, markov chains or things like that. Keeping asset allocation in a range is easy but to keep it more precisely ...
-1
votes
1answer
949 views

Please Explain the Debt to China [closed]

Can someone please explain to me how we are in debt with China? Every weblog, article, journal I read have people in the comments going insane about how we "owe China monies" and "China owns the US" ...
5
votes
1answer
4k views

Annualzing the log of daily returns riddle

Two popular ways to measure returns are Arithmetic returns and Log returns. Let's define arithmetic (simple period) returns as: P(t) - P(t-1) / P(t-1). Let's define log return as Ln( P(t)/P(t-1) ) or ...
9
votes
1answer
2k views

Easiest and most accessible derivation of Black-Scholes formula

I am preparing a QuantFinance lecture and I am looking for the easiest and most accessible derivation of the Black-Scholes formula (NB: the actual formula, not the differential equation). My favorite ...
5
votes
2answers
1k views

Market Value of a CDS

I need to model the market value of CDS in a portfolio. My current approach is to calculate the present value of the future spread payments - does anybody have a better idea to solve the problem? ...
8
votes
4answers
689 views

What are the risk factors in analysing strategies?

What do you think of strategies displayed on timelyportfolio.blogspot.com? I really like the fact that there is some code to reproduce the strategies, but they seem very elementary because he does ...
6
votes
4answers
987 views

Which data service to buy for redistributable data?

This is a follow-up to my previous question regarding anyone whom wanted to 'donate' data. So far no one has stepped up (learning more about buying and selling data, I realize that I'm going to have ...
4
votes
1answer
144 views

Where can I find the standard discount curves for the standard CDS model?

Where can I find the standard discount curves for the standard CDS model? In particular I'm keen to see if ZAR is a supported currency yet...
8
votes
1answer
489 views

QuantLib and exact numerical simulation

I've just downloaded quantlib and started playing around with it, and it looks like it's designed primarily to use Euler discretizations for everything -- so far as I can tell, there's not even a ...
9
votes
1answer
266 views

Is there a standard / methodology to determine and grade the quality of OHLC data?

Inputs are most important to any decision making. For strategy backtesting, the OHLC data is one of the most inputs. So to ensure the correctness and integrity of OHLC data, we have checks on the ...
3
votes
3answers
12k views

How to calculate expected return based on historical data for Mean Variance Analysis

I've recently started reading some books on asset allocation and portfolio theory but I don't work in the field and don't have much knowledge yet. So I've been reading up on mean-variance analysis ...
6
votes
2answers
245 views

How to represent constraints for optimization problems in a data model?

I am at the moment writing a program focusing on asset allocation and I am thinking about how I should represent my constraints in the data model. The first approach that came to mind was to define ...
3
votes
1answer
334 views

FX option history

I am testing my model and I am interested in options prices on EUR|USD for Jan, 2011. The history can be even daily - but I have never had a deal with fx options, so I don't know where start to look ...
15
votes
4answers
8k views

Usage of NoSQL storage in Finance

I am wondering if anyone has used NoSQL (mongodb, cassandra, etc.) to store and analyze data. I tried searching the web but was not able to see if the financial firms had gotten in to using nosql ...
11
votes
3answers
3k views

Papers about backtesting option trading strategies

I am looking for all kinds of research concerning option trading strategies. With that I mean papers that publish results on different option trading strategies properly backtested with real-world ...
1
vote
1answer
272 views

Reading recommendation on using statistical analysis in online fraud prevention [closed]

Can you please recommend good reads on statistical analysis related to online fraud detection and prevention of account abuse?
3
votes
0answers
161 views

Benefits of Diversification and Rebalancing with negatively skewed leptokurtic return distribution?

I am missing tools to investigate this issue. I am trying to solve this question here. What kind of issues should you acknowledge over the naive diversification/rebalancing with normal distribution? ...
13
votes
4answers
4k views

Implementing data-structures in a Limit order book

I'm working on implementing a 'LOB' and I'm being very careful about choosing my data-structures so as to maximize performance. Using F# as an example, I need to consider a List versus Array for ...
10
votes
1answer
420 views

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 ...
3
votes
1answer
403 views

What research exists regarding implementation of reverse stress testing?

I need to implement a reverse stress testing model (definition here) I have searched around and cannot find anything substantial on the topic. Does anyone know of any good papers/references ...
7
votes
3answers
1k views

Optimality of Kelly criterion in non-normal environment

It is a not so well known fact that the Kelly criterion is only optimal in a nice and well-behaved Merton-world. It is far from optimal when things are getting non-(log)normal (i.e. more realistic!). ...
13
votes
2answers
485 views

Variable Selection in factor models

Let's say you have a dependent variable and many independent variables. What are the preferred metrics for sorting and selecting variables based on explanatory power? Let's say you are not concerned ...
5
votes
1answer
173 views

Quantifying Hedging Error Due To Expiration Day Range?

Let's say I have two call option liabilities that I want to statically hedge with a single call option. Liabilities: Liab_Call_1: Strike: 100 Notional: 1000 DaysToExpiration: 20 Liab_Call_2: ...
16
votes
2answers
784 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 ...
7
votes
2answers
468 views

Change of measure discrete time

Suppose I have a random walk $X_{n+1} = X_n+A_n$ where $A_n$ is an iid sequence, $\mathsf EA_n = A>0$. How to construct a martingale measure for this case?
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 ...
10
votes
3answers
1k views

Is Conditional Value-at-Risk (CVaR) coherent?

When the risk is defined by a discrete random variable, is CVaR a coherent risk measure? I stick to the following definition of CVaR: $$ CVaR_\alpha(R) = \min_v \quad \left\{ v + \frac{1}{1-\alpha} ...
12
votes
8answers
958 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 ...
16
votes
6answers
2k views

How random are financial data series?

Pseudorandom number generators are often tested using e.g. a test suite like Diehard tests or Dieharder. If one would run these tests e.g. on stock market time series or other financial data, would ...
5
votes
3answers
269 views

How does order fulfillment proceed with larger orders?

If a large sell order hits many bids from the book, is the order filled at once? Or is it filled one bid at a time with a chance for any new orders to come in between each trade?
9
votes
5answers
1k 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 ...
9
votes
3answers
4k 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 ...
7
votes
1answer
388 views

Do people use unbounded interest rate models, and what alternatives exist?

A simple interest rate model in discrete time is the autoregressive model, $$ I_{n+1} = \alpha I_n+w_n $$ where $\alpha\in [0,1)$ and $w_n\geq 0$ are i.i.d. random variables. When working with ruin ...
-1
votes
1answer
580 views

How stressful is work of quants? [closed]

I would like to know how stressful this work can be and where the stress could come from. How to avoid it? Does it really depend on the company you are working? Is there a way to know in advance if ...
4
votes
1answer
287 views

Divergence issue with my monte carlo pricer…

I am trying to implement a vanilla European option pricer with Monte Carlo and compare its result to the BS analytical formula's result. I noticed that as I increase (from 1 million to 10 millions) ...
6
votes
2answers
489 views

Vanilla European options: Monte carlo vs BS formula

I have implemented a monte carlo simulation for a plain vanilla European Option and I am trying to compare it to the analytical result obtained from the BS formula. Assuming my monte carlo pricer is ...

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