In his book - Advances in Financial Machine Learning, Marcos Lopez de Prado familiarises the reader with a number of ways of normalizing our financial time series data. Below I provide a couple of examples (source: here) for the purpose of this question:

  1. Time Bars: Bars indexed by time intervals, minutely, daily, etc. OHLCV (Open, High, Low, Close, Volume) is standard.
  2. Tick Bars: Bars indexed by orders, with each set # of orders (usually just 1) creating a distinct bar. Order price, size, and the exchange the order was executed on are common.
  3. Volume Bars: Bars indexed by total volume, with each set # of shares traded creating a distinct bar. We can transform minute bars into an approximation for volume bars, but ideally we would use tick bars to maintain information for all parameters across bars.
  4. Dollar Bars: Similar to volume bars, except measuring the total value in USD traded hands. An example would be $100,000 bars, with each bar containing as precisely as possible that dollar value.

When transforming time bars of log returs to volume bars or dollar bars, the series are much closer to nomrally distributed.

Another very standard way of normalizing time serie would be to:

  1. Volatility normalize per security
  2. Demean the time series

My question is: Is there a significant difference between the normalization of Volume or Dollar bars vs. Vol normalize and Demean?


Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Browse other questions tagged or ask your own question.