10
votes
5answers
10k 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?
10
votes
7answers
826 views

What is the fair price of this option?

Without having to use Black-Scholes, how do I price this option using a basic no-arbitrage argument? Question Assume zero interest rate and a stock with current price at \$$1$ that pays no dividend. ...
10
votes
5answers
4k views

Best way to store hourly/daily options data for research purposes

There are quite a few discussions here about storage, but I can't find quite what I'm looking for. I'm in need to design a database to store (mostly) option data (strikes, premiums bid / ask, etc.). ...
10
votes
3answers
19k views

Calculating log returns using R

I am trying to calculate the log returns of a dataset in R using the usual log differencing method. However, the calculated data is simply a vector of zeroes. I can't see what I'm doing wrong. Here ...
10
votes
3answers
501 views

How to group timeseries showing similar curve

I am trying to classify similar looking curves of a timeseries and was wondering what is the best algorithm to research. Reading R, it looks like k-means clustering could be applied - but I don't know ...
10
votes
2answers
3k 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 ...
10
votes
3answers
3k 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 ...
10
votes
1answer
1k views

academic papers about market making

I am looking for academic articles which model the p&L of market makers. I have read the Ho-Stoll (1984) article. Is there any recent article on this subject?
10
votes
1answer
431 views

Processes used in quant finance

What are the main stochastic processes (and their SDE) used in quant finance? For example to model currency prices, stock prices, etc.
10
votes
7answers
1k views

When hiring a quant, how can I protect my IP?

I am a one-man operation, and would like to hire a quant for around 4 weeks or work. I am worried that the person I hire might copy my data or the indicators that I have him work on. What have ...
10
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) ...
10
votes
3answers
4k views

R code for Ornstein-Uhlenbeck process

Can any one help me with some R code to run Ornstein-Uhlenbeck process?
10
votes
3answers
2k 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 ...
10
votes
2answers
3k views

Why a self-financing replicating portfolio should always exist?

According to my understanding the derivation of the Black-Scholes PDE is based on the assumption that the price of the option should change in time in such a way that it should be possible to ...
10
votes
3answers
824 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 ...
10
votes
4answers
768 views

Are e-mini markets manipulated?

Are the prices of e-minis such as S&P 500, Russell 2000, EUROSTOXX, etc. manipulated? That is, are there traders who trade large enough positions to make the price go in the direction they want, ...
10
votes
3answers
2k views

How to solve for the implied stock lending rate given equity options prices?

When market makers price options on hard-to-borrow equities, they include the cost to borrow the underlying equity that their broker is going to charge them to sell the security short to hedge. I'm ...
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 ...
10
votes
3answers
4k views

Total Return measurement paradox w/ Adjusted Close Prices

Using total return calculations is critical in developing security selection models. The standard way to measure total return is to develop a series of price-adjusted data. Investopedia describes the ...
10
votes
4answers
7k 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?
10
votes
2answers
785 views

Reference request: Survey article on GPU in Finance

I would like to get and idea of how people use GPUs in finance. I can find some specific papers or books on the subject. GPUs in binomial model, finite difference, monte carlo,... But I couldn't ...
10
votes
5answers
959 views

Is it ever possible that---because of illiquidity---exercising an out-of-the-money option is better than directly buying the stock?

Is there a case, where due to illiquidity, exercising out-of-the-money options could be better than directly buying the stock? When a stock is too illiquid, there are some costs because of this ...
10
votes
2answers
803 views

How to compute performance attribution between daily rebalanced strategies?

I have a daily rebalanced portfolio of several strategies. After one month, I now want to attribute the performance to the different strategies. There are several ways to do it. For instance one ...
10
votes
2answers
3k 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), ...
10
votes
5answers
1k views

How to conduct Monte Carlo simulations to test validity of Black Scholes for a specific option?

In reference to the original Black Scholes model, what approach is best to test the model in a rigorous way? Is there a standard approach that can accomplish this in a reasonable amount of time? ...
10
votes
3answers
467 views

How would you test the hypothesis “There are no idiosyncratic returns available in the market”?

A commentary attributed to Matt Rothman had recently (in the past six months) been making the rounds of the internet echo chamber claimed "There are no idiosyncratic returns available in the market". ...
10
votes
2answers
217 views

Why are futures valueless?

I understand that futures exchanges are set up in such a way that traders don't pay cash in order to assume a long position on a futures contract; they simply "enter into" the contract, essentially ...
10
votes
1answer
660 views

If stock A has a 60% chance of rising, and stocks A and B have 80% correlation, what is the chance of stock B rising?

As in the subject, I'm interested in a math puzzle of sorts: If stock A has a 60% chance of rising, and stocks A and B have an 80% correlation, what is the chance of stock B rising? Would it be ...
10
votes
3answers
2k 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 ...
10
votes
3answers
6k views

What are the main limitations of Black Scholes?

Pls explain and discuss these limitations, and explain which models can I use to overcome these limitations. Alternatively, provide examples of how to modify the original Black Scholes to overcome ...
10
votes
3answers
179 views

Portfolio construction in reality?

There are various models for portfolio selection in literature, like, Harry Markowitz (HM) model ( Mean-Variance Model) [well known model] Konno and Yamazaki (1991) model: minimizes the sum of ...
10
votes
3answers
348 views

Is there a website that lists replication code of financial papers?

There are lot of questions on this website related to the replication of the empirical part of financial papers. I noticed that some (honest) authors provide on their personal website some ...
10
votes
2answers
6k views

Why using 3 months forward to hedge fx risk on a fund of funds portfolio?

In my previous job, a fund of funds, they used 3 months forward FX contracts (renewed every 3 months) to protect their portfolio against currency risk. If I do understand why forwards are useful for ...
10
votes
3answers
890 views

What is the expected return I should use for the momentum strategy in MV optimization framework?

As all research on the momentum strategies are focused on the indicator, i.e. the entry point, there seems not much discussion on its expected return? Though there are some discussions on the exit ...
10
votes
3answers
4k views

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 $\sqrt{(days/252)}$ $*volatility*mean*$ $\log(mean)$. ...
10
votes
2answers
328 views

Why do Human traders make money?

Over the years I met a couple of dozen of (human) traders who I'd consider good (being in the business for several years, generating a reasonably steady income). I had chances to chat with some of ...
10
votes
3answers
367 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 ...
10
votes
1answer
949 views

How to compute modified-CVaR in the PerformanceAnalytics package?

My objective is to measure the modified-CVAR for a portfolio given its weights and matrix of security returns. Luckily the wonderful package PerformanceAnalytics has an ES() function that does just ...
10
votes
5answers
5k 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 ...
10
votes
2answers
398 views

How to “uncluster” a set of financial data?

I am attempting to evaluate and compare the profit factor of different "test runs" of a FOREX trading strategy. My problem is that, despite an average time between orders of 2hr+, some of these runs ...
10
votes
4answers
2k views

Is the risk-free rate really limited by inflation?

In all the classic texts on equities derivatives, there is an assumption of the risk-free rate r. We can immediately dismiss the concept of a fixed rate; all interest rates are variable (and ...
10
votes
1answer
1k views

Intuitive explanation of the Hansen-Jagannathan bound

The Hansen-Jagannathan bound states that the maximum Sharpe ratio of a portfolio can't exceed the ratio of the standard deviation of a stochastic discount factor to its mean. I more or less understand ...
10
votes
2answers
2k views

What are some examples of Compound Poisson processes in insurance?

I'm writing the Bachelor thesis but I need some information. I need to find some practical examples and applications of the Compound Poisson Process in insurance. Does anyone have any good examples?
10
votes
1answer
943 views

What is the Sugihara Trading System?

I recently heard the term Sugihara Trading System. I guess it might be some trading strategy or a special model to predict trends in market data, but I couldn't find out anything about it. Does anyone ...
10
votes
2answers
601 views

What are important model and assumption-free no-arbitrage conditions in options trading?

In the paper "Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula" (Espen Gaarder Haug, Nassim Nicholas Taleb) a couple of model-free arbitrage conditions are mentioned which limits ...
10
votes
1answer
179 views

Breaking Transactions Down into Derivatives

We were talking about merger arb in a class I had last night, and when we got do deal construction it was mentioned that the different ways can be viewed as different options. For instance a fixed ...
10
votes
2answers
511 views

Exploiting breakdowns in correlation of estimated volatility

In the attached image I have a plot of the rolling correlation of 90-day historic volatility (using the Garman Klass estimator based on Sinclair's Volatility Trading) of JPM v. the S&P. As can be ...
10
votes
1answer
659 views

Can VIX be interpreted as a proxy for instantaneous volatility?

BJO06 (Table 2) estimate the following Cox-Ingersoll-Ross model for market variance, $\sigma^2_t$: $\mathrm{d}\sigma^2_t = (\alpha_0 + \alpha_1\sigma^2_t)\mathrm{d}t + ...
10
votes
1answer
1k views

What are the advantages / disadvantages of the ANTICOR algorithm?

The algorithm is introduced in the paper, Can We Learn to Beat the Best Stock. The obvious advantage is superior risk-adjusted returns (if you can actually achieve them). Transaction costs and ...
10
votes
2answers
425 views

GARCH model, expectation of volatility?

Consider a time series $\{r_t\}$ following a standard GARCH(1,1) model, i.e., $$ r_t = \sigma_t \epsilon_t,$$ where $\epsilon_t \sim N(0,1)$ and are i.i.d, and $$\sigma_t^2 = \omega + \alpha_1 ...

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