All Questions

I'm investigating a situation where the chance for gain or loss is the same, but the amount gained is greater than the amount that is lost. For example, the gain would be about 30% of the trade ...

The general idea of cleansing a correlation matrix via random matrix theory is to compare its eigenvalues to that of a random one to see which parts of it are beyond normal randomness. These are then ...

I am new to investing. I understand that the P/E ratio along with other data can be used to determine whether a stock may or may not be undervalued. Are there situations where a HIGH P/E is actually ...

The derivation of the Black-Scholes model assumes no counterparty risk. Does the presence of counterparty risk invalidate the argument behind the model? EDIT: The question is about options in general,...

I was going through the paper of Avellaneda (2008) on stat arb and I found it interesting that he uses asset returns vs. their respective ETFs to compute the s-score. I am wondering if anyone has ...

I have always felt that equity market making was a speed game for HFTs. But recently I talked to someone on the buy side, who made a claim to the contrary. He argued that with the right market making ...

Traditional portfolio optimization involves mean variance optimization, where only the mean and covariance matrix of returns are estimated. What asset allocation and portfolio optimization techniques ...

I am calculating betas on intraday trade data at 15-minute intervals. For simplicity sake, let's assume I am modeling \begin{equation} Y = \beta * X + c \end{equation} where $Y$ is the return of XLF ...

This is a question responding to weekly topic challenge. I happen to see an interesting question from SYMMYS by Michael Kapler. I always approached expected return and risk modeling as separate ...

Usually in asset allocation you have a quantitative approach (which can be from example mean-variance), but you (or you and your firm) also have a more qualitative approach given market-conditions, ...

Note: This question was written for the weekly topic challenge. Many asset allocation funds presume the investor knows his target risk level, typically on some spectrum from conservative (mostly G7 ...

The classic mean-variance optimization problem tries to minimize variance of a portfolio for a given expected return: $$ \underset{w}{\arg \min} \quad w^T \Sigma w \quad \text{s.t} \quad \mu^Tw \geq \...

Note: This question was written for the weekly topic challenge. Many of you who deal with asset allocation will probably already be familiar with Mebane Faber's Timing Model, based on one of SSRN's ...

I am curious about possibilities and theory here. Basically a "problem" with trying to get large positions is that it would move the market in the direction that you are loading up on, therefore ...

I hope this is an appropriate question for this forum... for me it is an obvious query since it intrigues me for a long time. Ok, assume there are 2 distinct classes of models: econometric (AR, MA, ...

I want to backtest several basic optimization methods (e.g. MVO, "most-diversified portfolio"), and I want to do this on a basket of different asset indexes. To start with, I want to simulate a 60/40 ...

According to my understanding the derivation of the Black-Scholes PDE is based on the assumption that the price of the option should change in time in such a way that it should be possible to ...

Obviously, strategies like "short everything" did well during this period, but getting the future right is one thing and having a robust strategy is another. In particular, many quantitative ...

I am interested in doing some research on plain vanilla equity options and equity index options. I have historical data for these options. I also happen to have market maker 'fair price' (bid and ask) ...

How does an option's time value (also known as extrinsic or instrumental value) depend on how far it is in the money or out of the money? In other words, how does the time value change as the ...

I have an intraday equity returns linear model that, overall, shows good values in terms of $R^2$, p-value and other explained variance statistics. Around 70% of the stocks show consistent R-squared (...

Let's say that I have a universe of stocks from a certain sector. I want to compute the market portfolio of this sector. Beta is the covariance between each stock and the market. But how do you ...

Since if the option's price is lower than its intrinsic value (eg. strike price - current stock price for puts), then an arbitrage opportunity arises from buying the option at bargain and then ...

I have no experience in finance, but I've been playing around with a virtual portfolio. I'm trying to control the "rank volatility" distribution - that is, the volatility of a stock's daily rank in ...

What are the most important portfolio management theories you must know in order to competently manage an investment portfolio? In order to keep the topic focused, I would like to narrow down the set ...

Suppose I want to compute the time value of money (present value, future value, etc). I need to put an interest rate into the calculation. Which real world interest rate would best be used here, ...

Long-only risk-parity portfolios have proliferated in recent years. An optimized long-only risk-parity portfolio requires that the asset weight * marginal contribution to risk of the asset is ...

One of the stylized facts of financial time series seems to be a fundamental asymmetry between smooth upward movements over longer periods of time followed by abrupt declines over relatively shorter ...

I understand that expected price changes of underlying assets are usually priced into options, but I don't understand how. For instance, before upcoming earning reports the option values are inflated ...

I try to understand the derivation of the Black-Scholes equation based on the "constructing a replicating portfolio". From mathematical point of view it looks simple. We assume that: Stock prices is ...

I am trying to make a theoretical hedge to a bull call spread. (buy out the money call, sell further out the money call) What I have now is almost effective but there is one possible 80% loss (...

I'm currently reading through an article on bond portfolio immunization against changes in the interest rate. I learned that the immunization can be done against instant changes in interest rate etc.,...

There is a multidimensional process X defined via its SDE (we can assume that its a diffusion type process), and lets define another process by $g_t = E[G(X_T)|X_t]$ for $t\leq T$. I would like to ...

I am trying to write a Monte Carlo simulation to calculate risk associated with some property based products. What is the most reasonable stochastic process to model property price index? Do people ...

I have the following asset returns Y and the predictions for the same periods Y': Y = { 10, 200, -1000, -1, -7 } Y' = { 1, 2, -3, -4, -5 } The OLR R-squared for ...

Daily data, such as open and close prices, is often available for much longer periods than high-frequency data. However, whenever backtesting any strategy that examines instruments traded in different ...

I was looking again at this question which basically haunts every quant I believe, and I was thinking about the effect of these gaps when computing volatility of the series. Let's define the problem ...

Discrete time series regression models, like ARIMA, are usually built around the assumption that we only have 1 available price for each period t, which I will call the Close. In reality asset time ...

Let me give you couple of examples. You're at a dinner and you order something. You could say: "It's OK" "It's good" "It's great" "It's fantastic" "I've never ate something this good" "Goodlike" ...

Im a software developer (freelance) working in investment banking, and I'm looking to improve my CV by gaining a better understanding of the financial quant role and the software used by quants to ...

I've recently begun working as a quant for a large bank, and one of my first tasks will be to improve the model determining the risk exposure of their insurance portfolio. The portfolio is fairly ...

Sorry for what must be a beginner question, but when I went to write code I realized I didn't understand exactly how historical volatility, or statistical volatility, is defined. Wikipedia tells me "...

When you are "long gamma", your position will become "longer" as the price of the underlying asset increases and "shorter" as the underlying price decreases. source: http://www....

I am looking for some info on how to estimate liquidity (intraday). I have read some researches and created intraday measurements of liquidity on time yet not on price. What I mean by this is that I ...

It is known (see for example Joshi-Chan "Fast and Accureate Long Stepping Simulation of the Heston SV Model" available at SSRN) that for a CIR process defined as : $$dY_t= \kappa(\theta -Y_t)...

I want to create a random (quasi random) process which goes through pre determined points and constraints. E.g. I have a daily price series but want to generate intra-day prices with the same OHLC ...

I am trying to construct a daily time series of prices and returns for some large universe of securities. However, all I have available are a monthly time series of the prices/returns (as well as ...

I have read some papers on quantitative trading strategies and it seems like strategies that focus on mean reversion or statistical arbitrage give signals that are dependent on some quantitative model....

A lot of the tools/libraries out there seem to focus on close to close time series analysis. This is all fine but I typically do not trade close to close, I will use limit or stop orders that may or ...

Has there been any studies done on the correlation between etf vs cash (i.e. GLD vs GD) for example and how they should theoretically move together, and what fundamental reasons could cause them to ...