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34

Correlation Correlations are notoriously unstable in financial time series - yet one of the most used concepts in quant finance because their is no good theoretical substitute for it. You could say theory is not working with it yet neither without it. For example the concept is used for diversification of uncorrelated assets or for the modelling of ...


34

CAPM as an allocation strategy. Market efficiency was predicated on several falicious ideas, including: Everyone can borrow (and lend) at the same rate, indefinitely (i.e. no matter their leverage) All information is known instantaneously by all market participants. There are no transaction costs. Rational behavior. One conclusion is that the ...


27

Everybody's favourite whipping boy: Identically and independently distributed returns, i.e. draws from $N(mu, sigma)$ to describe returns. We could of course split this is arguing identically distributed (and mixture modeling as well as robust methods help) independently distributed (and everybody agrees that there is some serial correlation though a ...


23

Value at Risk The great idea to have systematic indicator for risk exposure but the problems arise when it's used as main or single indicator without looking at other risks (e.g Credit risk or Liquidity risk). Emanuel Derman wrote about it recently in his blog: But they (GS) did it not with a new formula or a single rule. They did it by being ...


19

I know that I have seen things like this in the past. Wasn't there something recently that used Twitter? Here are a few recent papers as examples, although I will be brutally honest that I don't know if they speak to your decent quality requirement: "Trading Strategies to Exploit Blog and News Sentiment" (Zhang, Skiena 2010) "The Predictive Power of ...


19

Department of Mathematics at University of Minnesota has 4 online lectures on financial mathematics - Lectures on financial mathematics: Notes on Financial Mathematics The Risk-Neutral World Δ-Hedging The Central Limit Theorem David Harper aka Bionic Turtle has set of small videos on his website about quantitative finance and risk management - Bionic ...


18

By "cryptography" you mean information theory. Information theory is useful for portfolio optimization and for optimally allocating capital between trading strategies (a problem which is not well addressed by other theoretical frameworks.) See: J. L. Kelly, Jr., "A New Interpretation of Information Rate," Bell System Technical Journal, Vol. 35, July ...


18

The lead paper in the January 2011 Journal of Finance (Hendershott, Jones, and Menkveld) addresses algorithmic trading (AT). In short, they find that AT improves liquidity as measured by bid-offer spreads. Taking the econometrics as correct (it is in the Journal of Finance) the next question is if bid-offer spreads are a sufficient statistic for measuring ...


16

Easily, the Efficient Market Hypothesis For many reasons. First, many adherents and critics support it for the wrong (often ideological) reasons. This applies even to well-known economists like John Quiggin. Second, because even fewer people know the extent and scope of the anomalies. The literature can get very technical. So even smart people ...


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 ...


13

Perfect delta hedging I my opinion delta hedging is also a dangerous one, but it definitely should teach though. In the BS framework, it is an allegedly perfect way of covering the risk incurred by buying (or selling) a derivative product (such as call and put in simplest cases). Nevertheless due to several real world facts this doesn't work that well ...


13

ArXiv is the standard resource of preprints in the field of physics. Almost all papers in physics are uploaded here before they are submitted to a journal. They also have a quantitative finance part: http://arxiv.org/archive/q-fin This section is not nearly as active as the physics-part of ArXiv though. Hopefully this will change in the future. There is ...


12

Below, I see a lot of support and resistance. Here's the code: x <- cumsum(rnorm(1000)) plot(x, type="l", main="Support and Resistance") Edit (03/03/2011) ================================================ Gortaur, I put my answer here to avoid filling up the comment area. Your question 1) "......I was not asking for the "garbage" literature, I can ...


12

In fact you have three papers available to go further: The Avellaneda-Stoikov one, with proper model and an approximate solution The Bayraktar-Ludvkosli one, with a solution for the linear utility function The L-Guéant-Fernandez one, with a full solution for a generic utility function I prefer the last one ;{)}


11

Just FYI the Reuters product is called NewsScope. The selling point is that they provide a sentiment reading per news item so the user doesn't have to do any NLP. If you have a Reuters sales rep or contact them then they can get you several research/white papers that are interesting. Here are the ones I have been able to find online (my sales rep has ...


11

My second best is Copulas I won't go as far as declaring gaussian copula The formula that killed Wall Street" (warning: lousy article), but will defer to T. Mikosch in his very good paper on misuses of copulas.


11

In a very, very general sense, what Renaissance Technologies does well [and others try to do, many do less well] is understand where the "true" signal is (i.e. where prices should be) and what is noise (i.e. over-/under-reactions by others in the market) in the total signal of market prices. Generally, trading profits are made by taking the opposing ...


10

This is a great question. I hope there are many valuable contributions. The recent (Jan 27, 28) MIT 150 Symposium, "Economics and Finance: From Theory to Practice to Policy". http://mit150.mit.edu/symposia/economics Specifically, the Jan 28 should be of interest (Finance). I particularly enjoyed Ross. "Finding Alpha" Videos (based on Falkenstein's ...


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 ...


10

Nick Higham happens to have given a talk on this very subject this summer; he continues to actively work to improve nearest correlation matrix algorithms. You can see his talk and notes here: http://mxm.mxmfb.com/rsps/ct/c/629/r/90368/l/48110


10

I find this one very helpful: Re-Examining the Hidden Costs of the Stop-Loss by Wilson Ma, Guy Morita, Kira Detko Abstract: In this paper, we present general implications of the impact of stop-losses to future returns. The use of stop-losses change return distributions, but not in the way that one would typically expect. We find that while ...


9

One might probably mention Yale's Endowment under David Swensen which generated returns of 13% per annum over the past two decades (as compared to the 8 or 9% average return of college and university endowments). Now, I would not label Swensen's approach to portfolio management with a pure absolute return strategy tag but he definitely uses some insights ...


9

I honestly think that most people who could be able to answer to this question simply won't either because they actually work for Renaissance, or because they work in a top quant hedge fund and they'll keep it a secret. I discussed this topic once during an interview and the guy said "we'll discuss this further if you get the job" lol. About papers, I'm ...


9

I did some digging and found the following papers - most of them offering quite a distinct perspective compared to classical option pricing theory! Stock Options as Lotteries by Brian H. Boyer et al. (2011) The Efficiency of the Buy-Write Strategy: Evidence from Australia by Tafadzwa Mugwagwa et al. (2010) The following is my favorite: You could do some ...


9

This answer is my ongoing attempt to consolidate some recent commentary on this hot topic. A good place to start for anyone thinking about this question is the Economists's Buttonwood: Not So Fast, which mentions recent research by Biais and Woolley (2011) and Dichev, Huang, and Zhou (2011). Does Algorithmic Trading Improve Liquidity? This paper claims ...


9

Yes Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes Strategic Asset Allocation and Commodities The Case for Commodities An Asset Class for All Seasons: The Benefits of a Strategic Allocation to Commodities No Should Investors Include Commodities in Their Portfolios After All? New Evidence My Take Although there ...


8

Backtesting - pure and simple. Its the logical and obvious thing to do right? Yet, so many pitfalls lie in wait. Be very careful people. Do it as little as possible and as late as possible.


8

Eric Zivot's Introduction to Computational Finance and Financial Econometrics on Coursera.


8

That's a tough question to answer. The "quant business" is a business. Some quants sell low-grade/low-volatility results, some sell fast-moving/unpredictable results, some sell industry targeted results, etc. It depends on what the buyer wants to buy. There's a market for everything. Haven't we all met people that think they're going to win the ...



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