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16

Wavelets are just one form of "basis decomposition". Wavelets in particular decompose in both frequency and time and thus are more useful than fourier or other purely-frequency based decompositions. There are other time-freq decompositions (for instance the HHT) which should be explored as well. Decomposition of a price series is useful in understanding ...


15

ML/AI systems are susceptible to a number of risks not traditionally discussed in risk management: What I call 'backtest arbitrage'. In the process of automated model generation and testing, your machine learner may discover, exploit, and concentrate on irregularities in your backtesting system which do not exist in the real world. If, for example, your ...


15

I'll take a stab at it, but this is a really broad question. A direct answer: Bayesian models often use "probability that the counter-party is informed." Indirect answers: I think your assumption is that the algorithm operates on each stock individually, and has no knowledge of what it's doing in any other stock. But, it is likely that the algorithm is ...


13

One simple method, based on the principles of mean-variance optimization, is to set the weights proportional to the product of the inverse of the covariance matrix and a vector of standard deviations. This implicitly assumes that the normalized expected return of each stock is equal. If you wish, you can take only the top 5 weights and set the others to ...


13

Of course it is fast enough. But what is fast enough? I know guys who trade off Excel sheets and they make millions, but those guys are clearly not active in high frequency space. So, it entirely depends on your trading frequency and average holding period. I also know of shops that run live trading systems by calling R functions, so, obviously Matlab ...


12

For "maximum pessimism" you should calculate thus: for longs - enter at the bar high and exit at the bar low on bar following signal bar for shorts - enter at the bar low and exit at the bar high on bar following signal bar I had previously heard this approach to back testing called the "torture test."


12

This is a very interesting question. I believe it is getting a lot of up-votes from people who have wondered the same thing and don't know where to begin, whereas you have at least laid out a reasonable-sounding plan. I commend you for that. However, it is not clear to me what you're trying to learn by posting this question. In my opinion, the plan you ...


11

"quote spam", "book colouring", "quote stuffing", etc encompass any mechanism to modify the shape of the orderbook by a market participant who does not intend to really buy or sell shares thanks to these orders. It means that someone fills the bid side of the book with 10,000 shares at different levels of price and does not want to buy at all, or only 100 ...


10

You need to investigate how to differentiate interpolation methods versus extrapolation methods. It's easy to build a model that repeats the past (just about any interpolation scheme will do the trick). The problem is, that model is typically worthless when it comes to extrapolating into the future. When you hear/see the word "cycles", a red flag should ...


9

These moving strategies are also known as trend-following. If returns have positive autocorrelation, hurst exponent > 0.5 that would be good for these strategies.


9

Great question! I think the most useful starting point is Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options by Bakshi, Kapadia and Madan (2003). Their paper proposes a definition of model-free implied skewness (they originally called it risk-neutral skewness, but MFIS is more accurate), which they prove will ...


9

Yes. First, it is much easier to proceed if you standardize the output of your forecast so they are in the same units (returns, for example, or probabilities of an event/condition occurring). After you have done this, there are 3 general approaches: Signal weighting: Then you need to define a weighting scheme for your factors. Richard Grinold has an one ...


9

At the top of this list I still recommend you to seek employment in order to learn from others in QF space. Could you possible work in a quant team within an investment bank where you currently reside? Start to reach out to the quant finance community so you are connected once you decide to locate to where you can practice this discipline.reach out to ...


9

Among matching rule, do not forget "auction calls", in most markets, you have one at the open and one at the close. To give you the main reasons to use one matching engine rather than another: Auction calls (i.e. fixings) are good to digest a lot of orders in a very short amount of time. It is why after a trading suspension, the trading starts with an ...


8

The risks involved in trading is everywhere and always a multifaceted thing: it includes the volatility of the selected asset, the leverage and concentration of the porfolio, whether there is a stop loss, a hedge, etc. Also, risk management is frequently not tied to the "alpha model" directly (e.g. VaR, shortfall, and scenario testing). For instance, one ...


8

The optimal growth portfolio is obtained by applying the Kelly criterion which is one of the pillars of the sound risk management. Ed Thorp's weekend forays to Las Vegas to play blackjack were one of the first historically documented cases of successful practical implementation of the Kelly strategy. Since then this method and its modifications have been ...


8

Market makers place quotes on both sides (ie, the bid and the ask). Depending on the market, the MM might even be contractually obligated to provide liquidity within some threshold. NYSE's designated market makers (who replaced the specialists a few years back) are an example. Even when there is no explicit requirement, the MM will quote both sides and ...


8

The very good description of specialized hardware in finance can be found at Cisco.com - Algo Speed High Frequency Trading Solution section. Their High-Performance Trading Architecture (pdf) poster is just great to find out used hardware for different purposes and there are also some presentations, white papers and videos about Cisco's solutions for ...


8

Edit: Freddy's answer is good -- we wrote concurrently. He rightly points out that QF is a broad field, and that it is among other things a community. Here, I describe a practical, down-to-earth path for getting your feet wet in one key piece of it -- software and model development for derivatives analysis, starting with vanilla options. Your best bet ...


8

I can think of an application in options pricing. I came across the following paper a long time ago but think it explains FT very eloquently as applied to pricing options under BS: http://maxmatsuda.com/Papers/2004/Matsuda%20Intro%20FT%20Pricing.pdf The fun starts on page 112 but it relies on the 1998 paper by Madan and Carr. What I like about the paper ...


7

There is no standard method and many techniques can work well, including simple time series z-scoring. I'm many cases, I would recommend using the simpler approaches unless the added complexity can be justified. However, the challenge with all techniques is the proper calibration, which is very much context sensitive. The parameter selection needs to be ...


7

What you are seeing is the Nasdaq Ticker Symbol conventions for CQS securities. You can essentially translate them at the below link: http://www.nasdaqtrader.com/Trader.aspx?id=CQSSymbolConvention


7

CXO-Advisory investigate the claim of this paper and conclude that evidence indicates that changes in open interest in futures markets are strong predictors of returns for associated asset classes, even after controlling for a number of conventional predictors. They state that investors may be able to exploit these predictive powers via tactical asset class ...


7

Slippage is multi-facetted, however, I think the main element to slippage is going to depend on the sophistication of your execution approach. Also, in your case there are 2 types of slippage: execution slippage (i.e. cost above mid to get your fill) tracking slippage (how much price difference between actual close and your fill price) Execution ...


7

The problem of the selecting the best portfolio (according to some risk measure) with a limited number of assets can be formulated as a mixed integer linear or quadratic program and is reviewed in the recent paper "Portfolio selection problems in practice: a comparison between linear and quadratic optimization models". It can be solved for reasonable sizes ...


7

The paper "Do option markets correctly price the probabilities of movement of the underlying asset? " by Yacine Aït-Sahalia, Yubo Wang, and Francis Yared should in my opinion provide many very usefull elements for this question (look in particular at section 3). Regards


6

Ehler's website has a technical papers section where there are papers available for free download, with code, so you can try things out for yourself. I personally have taken some of his ideas and combined them with other reading, forums etc. on the net and think that applying DSP to trading shows great promise and is definitely worthy investigation. If you ...


6

Maybe a better question title is "Can futures market open interest predict commodity, treasury, and equity returns"? I saw this paper in an earlier form and it still baffles me. Superficially, it makes sense that price*quantity holds more information than just price when quantity can change quickly (i.e., outstanding futures contracts changes more quickly ...


6

There is no need to complicate things: ... d = getBdepth(); d = getOdepth(); // for the calls below pos == 0 means the best bid/offer p = getB(int pos); // bid price at pos p = getO(int pos); // offer price at pos q = getBq(int pos); // bid quantity at pos q = getOq(int pos);// offer quantity at pos Note that the above API is not the best choice if your ...


6

There is a paper of mine answering To this question: Dealing with the Inventory Risk. A solution to the market making problem by Olivier Guéant, Charles-Albert Lehalle, Joaquin Fernandez Tapia.



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