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14

Ledoit and Wolf shrinkage methods ("Honey I shrunk the sample covariance matrix") Ceria and Stubbs - Robust optimization literature (2006) Stock & Watson (2002ab) - papers on large N small P estimation Rockafellar & Uryasev (2000) - "Optimization of CVaR and coherent risk measures" Sorensen, Qian, Hua - "Quantitative Portfolio Management" Ang ...


10

Very good question! I think part of the answer lies in the structure of the financial industry. Some anomalies have a certain kind of structure which cannot be exploited by the players that are big enough to let the anomaly disappear. I would put e.g. the Turn-of-the-month effect (TOTM) into this category since big funds just can't turn their whole ...


8

I believe this is a nice paper for you to start with. Check out what references it cited and who cited it. Markov Chain Monte Carlo Analysis of Option Pricing Models "Use the Markov Chain Monte Carlo (MCMC) method to investigate a large class of continuous-time option pricing models. These include: constant-volatility, stochastic volatility, price ...


7

Grinold and Kahn (2000) remains the bible for people just starting to get into quantitative portfolio management. Some readers may prefer the treatment in Litterman (2003). Both of these, however, are thorough books covering all the foundational material. Most of the recent work in portfolio management has built upon the research covered in those books. ...


7

A very conservative stand is to distinguish between anomalies and arbitrage opportunities. Roughly speaking, while an arbitrage opportunity is risk-free by definition, an anomaly allows for unaccounted risk factors. It is the magnitude of these unidentified risk factors that might determine the long term persistance of certain anomalies. A good starting ...


7

Here are couple references. Especially the first link to Andy Lo's paper contains a list of Sharpe ratios of popular mutual and hedge funds: The Statistics of Sharpe Ratios Dow Jones Credit Suisse Hedge Fund Index Hedge Fund Performance and Generalized Sharpe Ratios I would go with the first paper.


6

Check this document out: link to pdf file Also, if you are concerned with actual performance of your code and want to implement efficient code then gsl libraries would be the first place look at: link. It's got everything you need.


6

These are all examples on Ito Formula in its general form (with quadratic variations):


5

Forward interest rates are negative whenever the yield curve is negatively sloped. The US term structure was inverted most recently around 2007. Hard to find bank deposits that have negative yields (find countries experiencing deflation and you may find it), however, treasury bills during recent times of financial stress have yielded a negative rate. The ...


5

By definition, the average investor holds the market portfolio. Risk aversion can be measured as the slope (i.e. ratio of expected returns to volatility) on the efficient frontier. Therefore, the risk aversion of the average investor assuming the S&P500 is the proxy for the market portfolio is the expected returns of the S&P 500 divided by the ...


5

The answer your are looking for might be the story in "Benchmarking Measures of Investment Performance with Perfect-Foresight and Bankrupt Asset Allocation Strategies", by Grauer (Journal of Portfolio Management). While this work main concerns are the differential ranking of various performance measures and with negative betas for market timing strategies, ...


4

Theta Calculus, a system for representation of complex financial instruments. Kupper & Drapeau's unification of risk concepts. Several papers by Schmid, Bodnar, Okhrin on optimal portfolio weights and tests of same. For example, A test for the weights of the global minimum variance portfolio in an elliptical model. Similarly, Kan and Smith's work on the ...


4

Here example of practical application of Markov ideas to trading.


4

I think you might be interested by an article I mentioned in this post: Carlo Acerbi from MSCI presents in this presentation an innovative approach to liquidity risk. The idea is basically to model how liquid an asset is and how your portfolio allocation should take this risk into account. This way of seeing risk is in my opinion pretty interesting an ...


4

Joel Greenblatt's "magic formula" is similar in spirit to classic value styles. He has a discussion of why he thinks it will continue to work (despite it's simplicity and public knowledge) around p. 73 in his Little Book that Beats the Market (see ...


4

I would start with explaining random walk (this should be fairly simple) and then making a connection to heat equation in discrete time. This paper is doing exactly this and by leaving out technicalities you should make this pretty intuitive for students. Basically the intuition is as follows: At each integer time unit, the heat at each point is spread ...


4

Check Noncommutative Geometry and Stochastic Calculus: Applications in Mathematical Finance


4

There are plenty of books on portfolio issues built according to formula "some theory + some R code (or Matlab, or S - which is very similar to R)". See for example Pfaff B. Financial Risk Modelling and Portfolio Optimization with R.// 2013. Best M.J. Portfolio Optimization. Chapman & Hall, 2010. W├╝rtz D. et al. Portfolio Optimization with ...


4

Introductory: "Introduction to the Mathematics of Financial Derivatives"; Salih Neftci More mathematical: "Stochastic Calculus for Finance I and II"; Steven Shreve


3

I have come across 2 markets where rates can be negative: Inflation protected bonds. These bonds are pricd with real interest rates. You can think of them as (this is the Fisher equation: $$ r = n - i $$ where $r$ is the real interest rate and $n$ is then nominal interest rate (the normal one) and $i$ is the (estimated or priced) inflation. Real rates for ...


3

I wouldn't put too much faith in IBES forecasts. You may remember this situation: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=889322 (In case the above link doesn't work, Google "Rewriting History Alexander Ljungqvist"). You'll find lots of excuses for worthless forecasts: http://www.princeton.edu/~hhong/rje-analyst.pdf Below is a graph that I ...


3

Here are a few more papers about MCMC and alike methods for derivative pricing and co. : Blanchet-Scalliet, Patras - Counterparty risk valuation for CDS Jasra, Del Moral - Sequential Monte Carlo Methods for Option Pricing Frey, Schmidt - Filtering and Incomplete Information in Credit Risk Peters, Briers, Shevchenko, Doucet - Calibration and Filtering for ...


3

Good leveraged loan tutorials are few and far between. I've looked far and wide, and the best I ever found was a leveraged loan handbook published by citigroup (by William Deitrick) in 2006 which is free for clients. Citi and Barclays also have two decent (but very different) bank loan models. For Citi, search for Terry Benzschawel. For Barclays, look in ...


3

Suppose that you have a model of returns, and a representative agent whose form of utility function you have specified right off the bat. This RA can be constructed, under conditions, from a population that is defined to have heterogeneous utility objectives. This is the problem of aggregation, and it's treated in every good asset pricing theory text (e.g. ...


3

A concrete example of negative forward rates is provided by the 3M CHF LIBOR futures. They're all trading above a price of 100, which implies negative forward rates. See the prices here. Despite the prices of the forwards, CHF libor hasn't actually fixed negative yet. But the forwards are certainly all below zero. Also, your formula for the forward rate ...


3

I would even stick to the original paper by Sharpe (1966): Mutual Fund Performance. The Journal of Business Vol. 39, No. 1, Part 2 pp.119--138 If you look at the numbers on Page 6 you can see that the funds sharpe ratios roughly are between $0$ and $1$. Since the Sharpe ratio already adjusts for the risk-free rate, you cannot really argue about its ...


3

Pardon the lack of an actual link, and the formatting, but in footnote 6 of "Alpha is Volatility times IC times Score", Grinold, Richard C., Journal of Portfolio Management, Summer 1994 v20 n4 p9(8), Grinold suggests that "a truly outstanding manager" might have an information ratio of 1.33: (6) A rough guideline for determining the required IC comes from ...


3

Perhaps check out Poti and Levich (2009), or in a different setting but from one of the same authors, Poti and Wang (2010) "The coskewness puzzle" in JBF. They directly address the issue of what level of SR is plausible.


3

I think this paper (which I skimmed once a long time ago and no longer have access to) may provide some insight: Cohen, Lauren, Karl B. Diether, and Christopher J. Malloy. "Shorting Demand and Predictability of Returns." Journal of Investment Management 7, no. 1 (2009): 36-52. It seems to consider stock loan fees which may be a proxy for "hard to borrow".



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