8
votes
3answers
801 views

What is the impact of high-frequency trading on market depth, liquidity, and volatility?

On the surface, bid-ask spreads are far more narrow than even several years ago. However, during periods of financial stress liquidity seems to vanish. Also, the increasing amount of fragmentation ...
3
votes
2answers
4k views

Risk Parity portfolio construction

If I would like to construct a fully invested long only portfolio with two asset classes (Bonds $B$ and Stocks $S$) based on the concept of 'risk parity' the weights $W$ of my portfolio would be the ...
2
votes
1answer
610 views

Reduce correlation in output of Minimum Variance Portfolio Optimization

After running a minimum variance portfolio optimization on a universe of ETF's I see the resulting portfolios tend to be composed of bond ETF or related treasuries/government ETFs. I suppose that ...
3
votes
2answers
729 views

Financial Mathematics - Martingales example

Was hoping somebody could help me with the following question. Prove that under the risk-neutral probability $\tilde{\mathsf P}$ the stock and the bank account have the same average rate of growth. ...
2
votes
3answers
871 views

How to choose a data center for deploying high frequency trading strategies?

We are in the process of selecting the data center for deploying our high frequency strategies. Does anyone has some questionnaire that can be used to figure out that what type of infrastructure ...
4
votes
2answers
241 views

Can we explain physical similarities between Black Scholes PDE and the Mass Balance PDE (e.g. Advection-Diffusion equation)?

Both the Black-Scholes PDE and the Mass/Material Balance PDE have similar mathematical form of the PDE which is evident from the fact that on change of variables from Black-Scholes PDE we derive the ...
3
votes
2answers
314 views

central limit theorem and VAR

If I have a lot of data points and number of different dependent variables, can I use central limit theorem to assume data is multivariate normal and compute my VAR? Is this the appropriate use of ...
2
votes
1answer
690 views

a simpler test for normality given skewness, kurtosis and autocorrelation and size of time series

I typically do a JB (Jarque Bera) test and DW (Durbin Watson) tests for check for normality given skewness, kurtosis and autocorrelation of the data. However this requires a CHI distribution table ...
6
votes
1answer
399 views

NASDAQ TotalView ITCH order reference number number characteristics

I am building a custom hash implementation for storing NASDAQ ITCH order messages. Obviously this is keyed on the order reference number and I am wondering if these numbers are sequential, random or ...
7
votes
5answers
2k views

Time series of PCA - Sign change in factor loadings

I have a time series of data that is 300 days long. I compute PCA factor loadings on a moving window of 30 days. There are 7 stocks in the universe. Thus factors F1 through F7 are calculated on each ...
5
votes
1answer
1k views

Optimizing a portfolio of ETFs

I am aware of how to do mean-variance or minimum-variance portfolio optimization with constraints like weights must add to 1.0 no short sells max weight in any ticker using basic quadratic ...
3
votes
1answer
230 views

Eurodollar Options Stike Price > 100 bps

Looking at Eurodollar IR options market data coming down from CME, I can see a whole host of options where the strike is > 100 bps. My understanding in this case is that puts will always be in the ...
5
votes
4answers
4k views

Historical Level 2 Data (Market Depth)

I'm currently looking to hone a system using market depth however I am looking for a good source of historical level 2 data. As of right now the best source of historical I have found is automated ...
5
votes
2answers
274 views

How to think about pricing this weather call option

So as opposed to the normal structure using a reference temperature and HDD/CDD, I'm looking at pricing a call option with a structure similar to the following: Daily option on maximum daily ...
0
votes
1answer
155 views

How do I check whether OAS value is correct?

How do I check whether the Option-adjust spread value I have retrieved from external calc utility is correct? Can you please tell me the steps to verify this?
3
votes
1answer
1k views

What does leverage cost?

Let's say I've developed a strategy that always outperforms the S&P-500, let call it the "magic strategy". Now I should be golden. All I need is to always have the S&P shorted with the same ...
7
votes
2answers
2k views

Non-SQL methods for high-frequency accounting?

Does anyone know of any prior art for non-SQL data structures for high-frequency accounting, whether client, broker, or exchange-side? I'm thinking specifically of the problem of booking individual ...
8
votes
0answers
407 views

Can we use White's reality check to compare two Sharpe ratios?

I read a paper from Ledoit and Wolf that proposes a method to compare two Sharpe ratios and a paper from White that proposes a method to compare $n$ trading rules. My question is: Can we use White's ...
1
vote
0answers
90 views

how to identify similar assets based only on a few price samples

Using quantitative finances techniques on limited information, how might one go about finding similar(highly correlated) assets whose public information is available? The only data offered on a list ...
4
votes
3answers
430 views

Is it possible to demonstrate that one pricing model is better than another?

Take the classic GBM (geometric Brownian motion) model for equities as an example: ds = mu * S * dt + sigma * S * dW. It is the basis for the classic ...
2
votes
1answer
145 views

Assumptions based on non-martingale?

Quantitative finance formular are mostly based on martingales, Poisson jump, GBM, CEV, etc.. The logic behind it is that martingale means the future could not be predicted, or, EMH (Efficient-market ...
7
votes
3answers
306 views

age-sensitive correlation measurements in finances

When it comes to comparing returns or prices of instruments like stocks/ETFs, are there any well-established formulas, or ones in common use, that place stronger emphasis on recent correlations more ...
3
votes
1answer
6k 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 ...
3
votes
3answers
612 views

portfolio diversification tester

Are there any online tools (optionally with developer API, to spare me the scraping) that given an existing portfolio, calculate how well a new candidate position would score to increase combined ...
6
votes
1answer
250 views

What are some quantitative ways to obtain the view confidences in Idzorek's version of Black-Litterman?

I'm using Idzorek's version of the Black-Litterman model for estimating asset returns. Idzorek's version bypasses the need to estimate directly the covariance matrix $\Omega$ of errors in the various ...
4
votes
2answers
225 views

Market order quantity greater than quantity of the inside quote at the exchange

If I send a market order to an exchange with quantity greater than the quantity of the inside quote at this exchange, and if another exchange has quantity to fill the residual portion at NBBO, will my ...
8
votes
1answer
663 views

Kalman Filter Vs Hough Transform

These questions are in regards to the Kalman filter and the Hough Transform. What are the Pros and Cons of using each method? In what situations is it better to prefer one over the other?
7
votes
3answers
1k views

Limit order book size

I am trying to write a highly optimised limit order book and I wondered what sort of size I can expect for: Range of limit prices Number of orders at each limit price I am developing custom ...
5
votes
1answer
622 views

Modified bisection formula for deriving implied volatility for a dividend paying american option

I am trying to work out the formula for calculating the implied volatility of an american option on a stock paying dividends (discrete payments or annualized yield). On page 171 of Haug The ...
12
votes
2answers
2k views

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 ...
3
votes
2answers
1k views

How to calculate COMPOSITE underlying implied volatility from ATM (near month) option prices?

I am trying to calculate the implied volatility of an underlying given observed prices of call and puts. There are two scenarios: The ATM strike is pinned by the market (i.e. underlying level == ...
4
votes
2answers
604 views

SKEW and VIX relations?

My question is about the CBOE published index VIX and SKEW. To start with, I consider working on the variance dynamics. I calibrate the market data (such as VIX and VIX futures) into the Heston ...
1
vote
2answers
506 views

One bar look-ahead backtesting

Suppose you backtest the EUR/USD (or GBP/USD) forex pair with this system on the 1min timeframe: 1) Enter the market at any time n: go long if the "future" bar n+1 has a higher close as the close ...
10
votes
1answer
429 views

Creating an n-factor Certainty Equivalent Discounting Formula

Brealey & Myers provide a certainty-equivalent version of the present value rule, using CAPM, as follows: $$PV_0=\frac{C_1 - \lambda_m *cov(C_1, r_m)}{1 + r_f}$$ $PV_0$ - Present Value of cash ...
7
votes
1answer
352 views

Simulating the joint dynamics of a stock and an option

I want to know the joint dynamics of a stock and it's option for a finite number of moments between now and $T$ the expiration date of the option for a number of possible paths. Let $r_{\mathrm{s}}$ ...
5
votes
5answers
1k views

How to fit probability density function from sample moments?

If I have calculated the sample mean, variance, skew and kurtosis of a set of data, how would I go about fitting a probability distribution to match these moments (i.e. choosing a probability ...
7
votes
1answer
4k views

What are the main differences between discrete and continuous time models when modeling asset price dynamics?

My intuition says that both approaches, discrete time models and continuous time models will be models (i.e. approximations) of reality. Therefore it should be possible to develop useful models in ...
-4
votes
1answer
4k views

How to annualize log returns? [closed]

I have daily log return from 01.01.2011 to 10.28.2011 and I'd like to compare the total return of that 10 months period (which is of -7.093%) to annual log returns of previous years. I know it's ...
3
votes
1answer
269 views

How to use volatility to assess the accuracy of a stock market model?

Background: For a dissertation I have a multi-agent stock market model that I am using to assess different mechanisms for producing particular dynamic regimes. A key point is assessing how closely it ...
2
votes
0answers
129 views

Calculating stock weight for SEC13F filers

I am trying to evaluate weight of stocks in portfolio for an investor. For this purpose I use SEC13F filings for particular quarters and historical prices from Yahoo. There are stocks in portfolio ...
4
votes
1answer
461 views

Discrete time Ho lee model

This is my first question in this forum. I am stuck with my current testing the Ho Lee model. I am having difficulty computing the perturbation factor $\Delta$. The ho lee model should be completely ...
9
votes
2answers
362 views

local price return and volume relationship

I wanted to see how the stock price and volume relationship is locally. So I tried ranking both the daily return (at day t) and volume (at day t) base on a 30 day rolling window with historical daily ...
8
votes
2answers
3k views

CAPM - Beta of zero and its implications on diversification

I don't know if this is the right forum in which to ask this question, but here goes. I'm working through Luenberger's Investment Science. The form of CAPM model given in the book is $$\bar{r}_i - ...
11
votes
1answer
692 views

Quantitative Analysis Games on Investing?

I have been playing a quantitative investing game (instructions here) that is actually quite interesting, teams have some time to decide their next moves. It requires all kind of knowledge such as ...
9
votes
1answer
427 views

copula-marginal algorithm

has there been any interesting work or advances on the copula-marginal algorithm (CMA) as proposed by Attilio Meucci. I am unable to find anything on the web other then the original article, here is ...
12
votes
2answers
7k views

Cross Currency Swap Pricing in nowadays environment

Multicurve setting has now become the new paradigm for vanilla swap valuation. For the record I give here (without getting into too much details) the methodoloy for pricing Euribor3M swaps in this ...
2
votes
0answers
268 views

vix futures vega per contract and tvix vega per share

How much vega in spx terms (straddle contracts) or dollar value is in 10 vix futures contacts and 10000 shares of tvix
10
votes
3answers
819 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 ...
4
votes
0answers
478 views

ATM volatility versus OTM volatility and directional standard deviation

The forward instrument vol curve is skewed to the downside (50 delta risk reversal, 25 put, 25 call) were trading several ticks to the put). Is there a smaller standard deviation (in price terms) to ...
9
votes
1answer
761 views

How are Expected Shortfall and Variance related?

I would like to know how Expected Shortfall $SF_\alpha$ and variance $\sigma^2$ are related. If I follow what Aaron Brown answered in this post, when the underlying distribution is Normal with ...

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