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location Vancouver, Canada
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visits member for 1 year, 7 months
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Jun
26
comment How to combine trading signals to achieve higher capital efficiency?
It is possible to online calculation of most of what you would need, see: thalesians.com/archive/public/academic/finance/papers/… But, as you say, perhaps that wouldn't be fast enough if you are doing HFT.
Jun
26
comment How to combine trading signals to achieve higher capital efficiency?
I've pointed out an approach that takes into account the covariance of the strategies' returns, the strength of the trading signals as well as your own risk tolerance. This is all well-trodden ground. The next level is stochastic control. But if you want to mess around talking about manually mixing and matching strategies, I guess that's your prerogative.
Jun
20
comment What broker/feed/APIsetup allows for recording the most accurate data (cheaply)?
I am evaluating activetick right now, so far so good. Next test is for cloud-hosted latency.
Jun
5
comment Why is the VIX futures market usually in a state of contango?
To get a handle on this, you need to look beyond the VIX futures to the VIX itself, what it means, how it's calculated, and what drives options prices. It's important to understand that the VIX futures are not futures on some fungible spot commodity, they are futures on an index calculated from different sets of option volatilities. Option implied volatilities exhibit rich skews and term structures by virtue of the limitations of the Black-Scholes model in expressing traders' views of actual supply vs demand, so the VIX futures contango problem is a deep one.
Jun
3
comment What exactly is the OIS Black VOL?
Yes, there is a way, but I am not aware of a easy way - the only way I am aware of is to price all the swaptions with the OIS vol to get their premium, then restrip them back to LIBOR vols. EDIT: that said, I don't know why you would need to, BBG has all the Libor vols too. EUSV011 Curncy vs EUVE11 Curncy for instance (LIBOR vs OIS)
May
31
comment Forward rates diffusion
This question is confused, if you are using Black to price a swaption, the rate you are simulating is the swap rate not the forward rate. If you want to price something which is the sum of four swaption of different tenors, you will be simulating four different swap rates. If you are okay with the inherent inconsistency of this whole approach, the short answer is Yes, you need to have correlated diffusions, because the sum of lognormals is not lognormal, despite the "linearity" of your contract.
May
29
comment Calculating volatility of inhomogeneous time series
Interesting approach, I was looking for that paper on inhomogeneous operators but this time I think I will to through there derivations myself! And I'll be keeping an eye on this question :)
May
25
comment What exactly is the OIS Black VOL?
Just find the LIBOR vols, there should be tickers for them too. VCUB is the function for configuring your IR cube, and if you hover over the points on the front page which is the post-interpolation data, after setting the dropdown to LIBOR, you should see the tickers for all those points. They don't quite follow a pattern so you have to double-check them all. Depending on where you sit, you might have your firm's contributed vols that you should be using instead, of course.
May
25
comment What exactly is the OIS Black VOL?
And to answer your first question, some people still quote LIBOR vols, but most caps and swaptions seem to be quoted on an OIS dual-curve-stripped basis. On Bloomberg, they probably tick out both OIS and LIBOR flavors of vols for all the main swaption points, so you shouldn't have a problem as long as you use the compatible vol for your model. A good test would be to see how well your LMM recovers the caplet/swaption prices that go into your terminal vol cube, if there's a disconnect between LIBOR vs OIS or Black vs Normal, your prices should be way off.
May
25
comment What exactly is the OIS Black VOL?
You wouldn't want to drop OIS Black vols into a LIBOR market model which is modelling LIBOR, but you would if you were modelling OIS with LIBOR on top as a deterministic (or stochastic) basis. papers.ssrn.com/sol3/papers.cfm?abstract_id=2311745 Fabio Mercurio has written some papers on extending LMM for joint OIS/FRA modelling.
May
25
comment What exactly is the OIS Black VOL?
OIS is used via dual-curve stripping in the inversion to produce Black vols. The alternative is LIBOR vols. Black vol is the alternative to Normal (Bachelier?) vol. It's not as simple as using the OIS numbers, one needs to re-derive the pricing formulae in the presence of multiple curves etc via no-arbitrage. FINCAD wrote a good primer paper on it.
May
9
comment Please advise on the choice of an automated trading framework
quantopian.com supports automated trading of python algos to IB.
May
9
comment Are the sin, cos, tan functions used in some financial calculations?
sinh and cosh are used in some formulations of the Heston model of stochastic volatility, but you're not going to be doing those on a calculator.
Apr
26
comment Effective simulation of multi factor Heston model
You can calculate the drift adjustments for a multifactor Anderson scheme, but I don't have them handy.
Apr
24
comment Volatility arbitrage - how is the profit extracted?
Riaz and Wilmott wrote a very readable paper which highlights the path-dependency of volatility arbitrage via dynamic replication. In short, if your delta hedge is constructed at the true future volatility, your P&L will be erratic but your profit ultimately guaranteed (assuming correct future vol prediction). If you hedge at the implied vol, your P&L is smooth, but your final profit will be stochastic.
Apr
22
comment Estimating Beta from unevenly spaced price history
This sounds like the same problem faced when doing model fitting on tick and order book data - do you have any handy references to the conversion from simple regression to using proper MLE when transitioning to asynchronous event data?
Apr
3
comment Weighted average implied optionlet/swaptions volatility
Everything (capped floater, CMS) will have one "implied volatility" which recovers the price. I am not sure you can find this number by weighting pieces of the input implied volatility surface, especially since usually one hand-picks which particular caplets/swaptions to calibrate the model to in the first place. There might be some rough relationship between the implied volatility and the local volatility surface, when pricing with local volatilities, but in general, I am not aware of any such relationship.
Feb
23
comment How are quants able to verify whether their calculated prices are any good
On the sell-side, one could argue that a 'good' model is one whose a posteriori replication PNL exceeds the quoted margin, or perhaps one that allowed you to sell the deal in the first place (depending on your level of cynicism). On the buy-side, assuming you aren't hedging, then a posteriori, the models which identify options that are mis-priced under P are the good ones. There's a big difference between models which are widely used, models which match the market well, and models which capture asset dynamics accurately. papers.ssrn.com/sol3/papers.cfm?abstract_id=2365294
Feb
20
comment Which interest rate model for which product
I look forward to hearing from someone with more front office experience than me, but the rule of thumb as I understand it is that one must use a model that can capture the dynamics and risks to which your product is exposed. So, a one-factor model is fine for a cap, since the cap is basically exposed to the risk of the level of the yield curve, and that's it. However, it's not sufficient for a spread option, since the dynamics of the spread can't be adequately modeled with one factor. I, too, would appreciate a more rigorous reference for this though!
Feb
12
comment Lower bound of ITM Calls when computing Implied Volatility
Ditto on checking your forward/rates/dividends. Likely you are using the wrong discount curve.