9
votes
2answers
218 views
Stochastic modelling of derivatives on dividends
I consider pricing and risk analysis of derivatives on dividends of the members of equity indices (such as Dow Jones EuroStoxx). There are options but I focus on futures.
What are common stochastic ...
9
votes
0answers
321 views
Law of an integrated CIR Process as sum of Independent Random Variables
It is known (see for example Joshi-Chan "Fast and Accureate Long Stepping Simulation of the Heston SV Model" available at SSRN) that for a CIR process defined as :
$$dY_t= \kappa(\theta -Y_t)dt+ ...
8
votes
7answers
2k views
Is “eoddata” a good data source?
Not sure if this is a relevant question for site, but I am looking to move to www.eoddata.com as my data source.
If anyone has used it, can you tell me how the data quality is ?
I am currently ...
8
votes
5answers
1k views
What exactly is meant by “microstructure noise”?
I see that term tossed around a lot, in articles relating to HFT, and ultra high frequency data.
It says at higher frequencies, smaller intervals, microstructure noise is very dominant.
What is ...
8
votes
4answers
954 views
What kind of specialized hardware is used in trading?
What kind of computer hardware, in additional to the 'conventional' fare, is actually used in trading? And what languages is it typically programmed in? I'm interested in ASICs, FPGAs, that sort of ...
8
votes
3answers
3k 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 ...
8
votes
3answers
1k views
How does pair trading work?
Explain pair trading to a layman. What is it, why would you want to do it, and what are the risks? Provide a real life example.
8
votes
4answers
341 views
Seeking Historical Non-Finance Datapoints for Backtesting
I'm working on some financial analysis code which I'd like to test against a historical dataseries to analyze the correlations to my algorithm to some non-finance related data. Ideally, I'd like to ...
8
votes
4answers
324 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 ...
8
votes
5answers
4k 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?
8
votes
3answers
818 views
8
votes
3answers
420 views
Reference on Markov chain Monte Carlo method for option pricing?
I have to implement option pricing in c++ using Markov chain Monte Carlo. Is there some paper which describes this in detail so that I can learn from there and implement?
8
votes
3answers
712 views
What tools are used to numerically solve differential equations in Quantitative Finance?
There are a lot of Quantitative Finance models (e.g. Black-Scholes) which are formulated in terms of partial differential equations. What is a standard approach in Quantitative Finance to solve these ...
8
votes
4answers
588 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 ...
8
votes
4answers
2k views
Should I use an arithmetic or a geometric calculation for the Sharpe Ratio?
What are the advantages/disadvantages of using the arithmetic Sharpe Ratio vs the geometric Sharpe Ratio? Is one more correct? Or is one better in certain circumstances?
8
votes
3answers
374 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 ...
8
votes
2answers
2k views
How can I compare distributions using only mean and standard deviation?
I only have means and standard deviations of samples of two random variables. What technique can I use to determine how similar the distributions these describe are? Assume that the values are built ...
8
votes
3answers
3k 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. ...
8
votes
3answers
666 views
Alternate money management strategies to Kelly?
Other than Kelly (or fractional derivatives), are there other money management strategies in wide use among quant funds? Certainly Kelly is mathematically optimal, but perhaps there are other ...
8
votes
3answers
427 views
Optimal execution strategy
Can someone shed some light on optimal ways to execute medium sized orders ~2000 shares in the market?
Unfortunately the execution algo I have access to is very dumb. It follows the top-of-book ...
8
votes
1answer
209 views
Do weights from portfolio theory contain bias?
I want to experiment with some portfolio modelling and I was wondering if you guys could help me with something. If I try to estimate and implement the traditional two-fund portfolio consisting of one ...
8
votes
3answers
584 views
Deterministic interpretation of stochastic differential equation
In Paul Wilmott on Quantitative Finance Sec. Ed. in vol. 3 on p. 784 and p. 809 the following stochastic differential equation: $$dS=\mu\ S\ dt\ +\sigma \ S\ dX$$ is approximated in discrete time by ...
8
votes
3answers
319 views
Pricing in HJM framework
As mentioned in earlier question, I am a math student, who attained a course in interest rate theory. However I have some question how these things actually work in reality.
So assume we are working ...
8
votes
3answers
596 views
Why isn't all market data free?
I am hoping any answers can be threaded somewhere between "don't be naive" and starting a quasi-political flame.
Transparency is suppose to be good for markets and also a social good. The market ...
8
votes
3answers
826 views
How can one compute the Greeks on VIX Futures
I am guessing the short answer to this question is "use the chain rule and linearity of the derivative," but I am looking for more specific advice on how to compute the derivatives of a VIX futures ...
8
votes
6answers
1k views
Vanna - any practical uses for risk or pnl attribution purposes?
What is the practical use for Vanna in trading?
How can it be used for a PnL attribution?
8
votes
2answers
446 views
Is Walk Forward Analysis a good method to estimate the edge of a trading system?
Do you think Walk Forward Analysis is a good method to estimate the predictability or edge of a trading system? Are there similar methods to know (estimate) how much alpha can capture an algo (in the ...
8
votes
2answers
573 views
Analytical relationship between a covariance matrix and cross-sectional dispersion
Given an expected returns vector and a covariance matrix, one can perform a joint draw and measure the average cross-sectional variation as the standard deviation across returns for a particular joint ...
8
votes
1answer
330 views
Any research paper on stop loss?
Has there been any rigorous study on stop loss ? When to apply it?
Has it been shown to work through proper statistical backtests?
I am interested in Equities, preferably European stocks.
8
votes
2answers
588 views
How does volatility affect the price of binary options?
In theory, how should volatility affect the price of a binary option? A typical out the money option has more extrinsic value and therefore volatility plays a much more noticeable factor. Now let's ...
8
votes
2answers
2k views
Equity Risk Model Using PCA
I'm trying to build a simple risk model for stocks using PCA. I've noticed that when my dimensions are larger than the number of observations (for example 1000 stocks but only 250 days of returns), ...
8
votes
4answers
2k views
Quanto CDS modeling
What is the market standard for pricing quanto CDS (i.e. CDS which pays the contingent leg in different currency than the pricing leg)?
8
votes
1answer
991 views
Estimation of Geometric Brownian Motion drift
One can find many papers about estimators of the historical volatility of a geometric Brownian motion (GBM). I'm interested in the estimation of the drift of such a process. Any link on this topic ...
8
votes
7answers
732 views
Has spectrum analysis ever been used successfully to analyse historical price data?
Spectrum analysis is often used to analyse waveforms. A common configuration, for example, is to create a graph where X is time, Y is frequency, and the brightness of each position represents ...
8
votes
2answers
456 views
Minimizing Correlation
Is there a quantitative method in monitoring trades to reduce the possibility of correlated trades?
8
votes
4answers
365 views
Position management in presence of continuous forecast
Let's say we have an equity liquidity-providing model that was fitted on 1 minute bar periods. The model forecasts the 1-min next period return given the activity of the previous bars. Now, when we ...
8
votes
3answers
2k 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, ...
8
votes
2answers
477 views
When should you build your own equity risk model?
Commercial risk models (e.g., Barra, Axioma, Barclays, Northfield) have evolved to a very high level of sophistication. However, all of these models attempt to solve a very broad set of problems. ...
8
votes
3answers
358 views
How do I eliminate developed currency funding cross rate risk in an EMFX position?
Back in the "old days" (ie 5-10 years ago) when we wanted to be long or short an emerging currency (say the ZAR, BRL, or TRY) we simply did everything against the pre-eminent currency of the day, the ...
8
votes
4answers
1k views
What is an effective way of backtesting VWAP execution?
From Optimal Trading Strategies :
There are two main reasons why traders
execute orders using a VWAP trading
strategy. First, a VWAP strategy is
the trading strategy that minimizes
market ...
8
votes
2answers
356 views
How to determine if one player moved a price
I'm trying to understand what caused certain price movements (aren't we all!) in per-minute data for major NYSE stocks. In particular, I'd like to determine whether a given price movement of X% in ...
8
votes
3answers
4k views
Rationale for OIS discounting for collateralized derivatives?
Can someone explain to me the rationale for why the market may be moving towards OIS discounting for fully collateralized derivatives?
8
votes
3answers
286 views
How to account for market movement when some exchanges are closed?
Daily data, such as open and close prices, is often available for much longer periods than high-frequency data. However, whenever backtesting any strategy that examines instruments traded in different ...
8
votes
1answer
306 views
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.
8
votes
1answer
820 views
What is the average Sharpe ratio of volatility arbitrage funds?
Where can I get data on performance metrics for volatility arbitrage funds? I am trying to compare the Sharpe ratio of my strategy to those of the major players.
8
votes
3answers
837 views
How to generate synthetic FX data for backtesting?
I want to generate synthetic forex data for the purpose of backtesting my trading algorithms. I have some rough ideas in mind on how to do this:
Start with a curve representing a trend, then randomly ...
8
votes
3answers
1k views
Earnings and valuation data sources online
Are there any free/cheap sources for historical data on company earnings and valuations? I can get historical price data from Google and Yahoo, and it looks like I can get about five years of ...
8
votes
1answer
282 views
Is there a closed-form solution for the partial autocorrelation function of a Markov regime-switching process?
Consider a Markov Regime-switching process $X_{t}$ with $k$ regimes represented by $s_{t}$ such that
$$X_{t}=\mu\left(s_{t}\right)+\epsilon_{t}$$
and
$$\epsilon_{t}\sim ...
8
votes
1answer
117 views
Simulating property price index
I am trying to write a Monte Carlo simulation to calculate risk associated with some property based products. What is the most reasonable stochastic process to model property price index? Do people ...
8
votes
1answer
795 views
How to apply the Kelly criterion when expected return may be negative?
My concern is how to handle a negative value for the Kelly formula. Even when you have a system that has positive expectancy, you can (and usually will) sustain a number of losses, sometimes ...
