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Aug
1
comment Looking for Research Paper on Creation of Currency Baskets
@BobJansen, unfortunately not (the paper I came across was a published in 2014, sorry should have mentioned that), but nonetheless thank you for the two links, the first paper I was aware of but unfortunately aims at different objectives (raw material price minimization of variances)
Jul
31
comment Looking for Research Paper on Creation of Currency Baskets
Thanks, I am familiar with the BIS methodology, but I am not looking for trade weighted indices. As mentioned I look for methodologies that exclusively source pricing data and preferably approaches that strip out individual currency strength/weakness
Jul
18
comment ETFs have lower tracking error than Futures?
Agree, it depends on the ETF and actual asset class, in case of VIX futures vs VIX ETF (VXX) the ETF has a much larger tracking error. Case in point, VIX Index advanced 39% at some point while the ETF advanced less than 9%. The futures fared a little better. The high tracking error (to the index) is related to several VIX specific issues but this is an example where generally the ETF tracks worse than the futures.
Jul
15
comment How do I calculate Sharpe ratio from P&L?
Of course it makes sense why would it not, it is important to know whether a high frequency trading strategy has sufficient turnover and generates sufficiently positive returns in the context of risk, taken, whether we talk daily Sharpe or annualized Sharpe.And as said bootstrapping, resampling, drawdowns, nor avg win/loss has anything to do with the question at hand. Anything that generates income (even your salary) is somehow capitalized, hence the ability to calcultate returns.
Jul
15
comment How do I calculate Sharpe ratio from P&L?
That is simply incorrect. Of course do any trading strategies allow for the computation of return metrics. How else do you think some hft houses generate and publish 7+ Sharpe ratio performance metrics? With all due respect but you do not sound like a market practitioner at all. Resampling is certainly not done by professionals in this context. And why do you talk about drawdowns or recovery periods when commenting on risk adjusted return metrics?
Jul
15
comment Sharpe ratio in days with no open positions
By the way your definition of information ratio is incorrect. Information provides a return in excess of a defined benchmark in the context of risk. It has nothing to do with signal-to-noise, not sure how you make that connection.
Jul
15
comment Sharpe ratio in days with no open positions
Call it whatever you want as long as you make the proper disclosure you can define and use whatever risk adjusted return measure pleases you. I merely reflected what from my experience in the market seems to be the accepted practice. You have of course a right to disagree and write up your own answer to reflect how you think the world ticks, which you have done. People care about understanding generated returns in the context of risk taken and if that excludes days on which no returns were generated and everyone knows through disclosures then everyone is happy.
Jul
15
comment Sharpe ratio in days with no open positions
Well you do not generate any returns, excess or not, on days you do not have open posions or close open positions.
Jul
15
comment Sharpe Ratio - my own calculation differs from Yahoo finance, Morningstar
Not saying that your answer is in any way deficient, just wanted to add that little bit of information. Cheers
Jul
15
comment Sharpe Ratio - my own calculation differs from Yahoo finance, Morningstar
I would argue that the inclusion of the risk free rate is a bit out-dated. I know of a number of hedge funds that do not include the risk free rate in their computations (albeit they mention it in the disclosure documents). There is no real risk-free rate, sovereign bills or bonds are anything but risk-free, including bills issued by the US Treasury. Imagine short rates were 20% then the Sharpe ratio with inclusion of Rf would be badly skewed. Sharpe is not a comparable risk measure but measures return relative to its own risk.
Jul
15
comment Sharpe ratio in days with no open positions
I disagree, because Sharpe is a measure of excess risk-adjusted, returns. It does not matter whether competing investments generate return during days you are not taking any risks. Sharpe is not a comparable performance measure such as the Information Ratio, its focus is on its own performance relative to its own risk taken, which is why a lot of practitioners actually leave out the risk-free rate altogether. I am not arguing here whether it should be included or not, but I try to make a point that days on which risk is not taken should not be included in the Sharpe ratio computation.
Jul
15
comment Sharpe ratio in days with no open positions
@feetwet, I am not sure I understand what you are trying to say. I mentioned explicitly that Sharpe is a measure of excess risk-adjusted return. Because it is risk-adjusted so you should not include days on which you do not take any risk, hence the exclusion of trading days on which no risk is taken. However, you still need to use business days in the market you trade for annualization purposes else you would not end up with an annualized Sharpe measure. So, I am not sure which part you disagree with.
Jul
14
comment What are the main differences between discrete and continuous time models when modeling asset price dynamics?
Well, in the real world things are a lot simpler: One makes money, the other loses. Guess who is right? If you happen to derive a model to which market prices almost surely converge then all the power to you, I have not come across such individual in my career so far. Generally market practitioners at the sell-side calibrate their models to market prices and look to extract money through pricing "edge cases".
Jul
14
comment What are the main differences between discrete and continuous time models when modeling asset price dynamics?
And sorry for my misnomer: I meant to say "closed-form solution" instead of "numerical method". And if you disagree with my general opinion on this topic then I invite you to write up your own answer. That is what this forum is for, different answers to reflect different schools of thought or approaches. But thanks for pointing out my incorrect usage of terminology.
Jul
14
comment What are the main differences between discrete and continuous time models when modeling asset price dynamics?
Not sure what you are trying to imply with your last comment but I can assure you that this is how it works in real life. You may have a point when it comes to other than no-arbitrage pricing models, apply whatever model you want and see fit, market dynamics will tell you whether the market converges to your model prices or the other way around. But I can assure you that your model is wrong if you get arbed by other market participants. Simple as that.
Jul
14
comment Option based portfolio insurance in practice
I edited my answer.
Jul
14
comment Option based portfolio insurance in practice
are you asking about going practice on the bank or insurance side? Thanks
Jul
14
comment What are the main differences between discrete and continuous time models when modeling asset price dynamics?
By my own admission I have as prop trader at one bank arbed brokers and extracted millions of dollars within a 2-3 month span for the precise reason that someone on the other side thought they are too smart and priced according to their own model that strongly disagreed with general market prices. Sometimes I let them off the hook if the price was just too off but at other times I held them to the trade because after all it is supposed to be an informed market where professionals trade among themselves. Hope this makes my point clear.
Jul
14
comment What are the main differences between discrete and continuous time models when modeling asset price dynamics?
Of course must models agree on price. You can implement whatever model you want but if your model under-prices assets your buy-side customers will happily buy from you in size and if you over-price they will sell to you. In either way you will at best be told by your desk head that you mess up and at worst you will find yourself looking for a new job. Keep in mind that most buy side clients request 2 way prices from sell-side desks from a number different competing sources.
Jul
10
comment What are the main differences between discrete and continuous time models when modeling asset price dynamics?
For most exotic derivatives numerical methods do not exist. You generally end up with some sort of discretization. But in either case taking into account no-arbitrage conditions, a discrete and continuous model must agree on price else the models are not identical and one of the two is wrong. I argue that you can price any derivative with a discrete model but only very few can be priced with continuous models. And to answer your last question (unless I misunderstand your question), absolutely yes, else the models would not agree.