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seen Sep 26 '12 at 3:20

Nov
11
comment How does Kalman filtering of beta in pairs trading model work in R?
That's seems to be a nice book to reference. I found these two pdfs explaining kalman filtering too: first, second
Jul
25
comment Why would an investor trade a variance swap over a volatility swap?
Definitely a matter of convexity. I think a relatively benign volatility market prior to '08 made dealers too comfortable in their var hedging. Add to that less liquidity in the single stock space (especially in the wings), and you'll end up with unhedged clusters of convexity. Which led massive pnl hits across the dealers. But there was still interest for the 'swap' model, so vol swaps started being quoted shortly after.
Jul
24
comment Why would an investor trade a variance swap over a volatility swap?
The hedging point is a good one. The relatively simpler product and less risky product (vol swap) is the harder one to hedge. But that said, buying a strip of options to hedge a var swap might not be the easiest thing with illiquid deep otm option markets.
Feb
25
comment How do I incorporate time-variability in a pair trading framework?
I like Pfaff's Analysis of Integrated and Cointegrated Time Series with R too
Feb
25
comment How do I incorporate time-variability in a pair trading framework?
Yup, that's exactly what I have done. My question is really how can I quantify the patterns?