28
votes
Accepted
What are reasons not to do factor investing in equity markets?
This question goes to whether the historical returns to factors represent:
Spurious results, overfitting, data mining...
Mispricing
Unexploitable effects
Compensation for risk
Case 1: Spurious ...
- 6,824
17
votes
Accepted
Term structure of Equity returns
Intro: Duration-Based Asset Pricing
Similar to bonds, we can define the duration of stock $i$ as
$$ Dur_{i,t} = \sum_{s=1}^\infty s\cdot\frac{\mathbb{E}_t[CF_{i,t+s}]e^{-s r_{i,t}}}{P_{i,t}},$$
where $...
- 15k
17
votes
Accepted
Most complete list of investment mistakes in stock markets
You find a (partial) list with many references in Table 1 from Liu et al. (2022, JFE) which I copy here:
Hirshleifer (2015, ARFE) provides a great review of the literature on behavioural finance.
- 15k
13
votes
Accepted
Cochrane on Return Predictability
Let $P_t$ be the price of the overall market index at the end of quarter $t$
Let $D_t$ be the dividend for the overall market in quarter $t$
Let $X_t = \frac{D_t}{P_t}$ be the dividend to price ratio.
...
- 6,824
12
votes
Accepted
What are the "sniffing" or "stalking" algorithms?
Sniffing (or stalking) algo indeed detects other algorithms. How does that work in practice?
Imagine the order book for a particular equity is: Bid 1 = 99 (size 10,000), Bid 2 = 98 (size 25,000), Bid ...
- 5,723
11
votes
Machine Learning vs Regression and/or Why still use the latter?
I was just like you when I started out: I had learned a lot about machine learning (mainly neural networks and genetic algorithms/programming) and used it heavily. I also had learned about classic ...
- 27.2k
11
votes
Accepted
How do better informed traders apply their advantage over the others?
Example from recent memory.
Right before New York open, Bloomberg posts an article saying country R's local news reported that R's government auditor said that country V has defaulted to R's loans to ...
- 11.3k
10
votes
Cochrane on Return Predictability
Maybe I am a little bit late to the party, but I want to give a shot. As in Campbell and Shiller, start from the identity $R_{t+1}\equiv\frac{P_{t+1}+D_{t+1}}{P_t}$ where $R_{t+1}$ is the gross return ...
- 1,876
10
votes
Accepted
Understanding how market making helps investors
I didn't quite understand your objection.
Most theories of market making are derived from a famous paper by Jack Treynor (The Economics of the Dealer Function). In the theory, there are initially no ...
- 10.3k
10
votes
Implied Volatility of stock on Think or Swim
What they gave you is Newton's formula.
If you have a function $f(x)$ then you can find the value $x_0$ such that
$f(x_0) = 0$ by this method. It uses the derivative $f'$ which in your case is the ...
- 13.5k
10
votes
How do I convert order book data into OHCL( Open,High,Low,close) format?
As Alex C. notes, OHLC bars are meant to be calculated using transaction ticks. However, you could try to make bars from bid/ask individually (or perhaps even the mean of the two as an approximation), ...
- 233
10
votes
Criteria to assess the possibility of corporate bankruptcies in U.S. equity exchange markets
Since the stock is listed on NASDAQ, you have access to fairly standard 10Q and 10K financial statements. So you can apply the analysis pioneered by Ed Altman in his Z-score paper - compare this ...
- 11.3k
10
votes
Accepted
Intuition for Stock Price Numeraire Drift
As a general principle, I would be wary of economic or financial interpretations of change of measure techniques. Changing numéraires is merely a mathematical tool to ease pricing, see for example the ...
- 7,705
10
votes
Is this how stock trading works?
In January 2020, Matteo Aquilina, Eric Budish, and Peter O’Neill from Britain's Financial Conduct Authority published this study, illustrating how "low latency" market participants can make ...
- 11.3k
10
votes
Most complete list of investment mistakes in stock markets
First, let me say that barring another post, Kevin should get accepted as the answer, but I wanted to add a class of biases that are in the literature, but not in the social science literature. In ...
- 4,249
9
votes
Accepted
Criteria to assess the possibility of corporate bankruptcies in U.S. equity exchange markets
I have been told:
Bankruptcy is very controversial Google Scholar Researchers.
You might track companies ratios (e.g., debt to equity ratio, ...
- 460
9
votes
Accepted
How do traders hedge against “tail side risk” in practice?
With difficulty and high costs and secretively. Successful ones are the ones that are able to do it more cheaply. This is also the reason for their secretiveness: prices would go up.
The costly but ...
- 8,258
9
votes
Accepted
Why techniques for portfolio optimization do not take into account the non-fractionability of stock prices?
There are a few related reasons:
The optimization becomes a lot harder when only discrete values are considered. Mean variance has a closed form solution for the continuous case but the case with ...
- 8,258
8
votes
Accepted
How can the market price of a stock be significantly lower than its Bid and Ask?
I don't see this issue in Bloomberg, therefore I would assume it is just bad data in your source. Based on my snaps I suspect that your bid-ask is 15 min delayed.
This stock is very active today, ...
- 4,287
8
votes
Poker and Options Trading
This pic and many more interesting insights about the connection can be found here: https://www.quora.com/Why-do-trading-firms-recruit-poker-players
- 27.2k
8
votes
Accepted
Where can I get the actual info about how many stocks are there in markets all over the world?
Per the factsheet for MSCI ACWI All Cap Index (as of May 31, 2019):
The MSCI ACWI All Cap Index captures large, mid, small and micro cap representation across 23 Developed Markets (DM) countries ...
- 11.2k
8
votes
Intuition for Stock Price Numeraire Drift
The drift is the expectation of the return over an infinitesimal interval. Let $Q$ be the risk-neutral measure and $Q^S$ be measure associated with the stock price numeraire defined by
\begin{align*}
\...
- 20.8k
8
votes
Is this how stock trading works?
You would definitely have some advantage. High Frequency Trading is all about speed and the fastest traders wins. Oftentimes, winner takes all.
The blog Sniper in Mahwah & friends digs into the ...
- 8,258
8
votes
Do stock returns show positive skewness?
I think most people agree that aggregate (index) stock returns have negative skewness. However, this does not appear to be the case for individual stock returns. These two papers find that average ...
- 1,377
7
votes
Accepted
Latency and Delays across Exchanges
The round-trip latency from point A to a matching engine at point B can be thought of being comprised of two components:
$RTT_{total,A \rightarrow B} = RTT_{network\_transit,A \rightarrow B} + MPL_{...
- 5,437
7
votes
Accepted
Why is volatility said to be persistent?
Two theoretical explanations regarding the long memory are given by:
The mixture of distributions hypothesis of Tauchen and Pitts (1983). Essentially this hypothesis states that trading volume and ...
- 2,542
7
votes
Which Database (MySql or NoSQL) for a Stock market App
An SQL database is generally best for structured data, ad-hoc queries and for queries involving joining several entities together to find the results. It will also help you maintain data consistency ...
7
votes
Accepted
What is the intrinsic value of a stock that doesn't give dividends?
In order to simplify my answer, "stock" refers specifically to common equity. Publicly traded shares which are not common equity entitle their owners to fundamentally different economic interests.
...
- 2,965
7
votes
Accepted
Does using adjusted closing prices constitute a lookahead bias?
To elaborate and emphasize a bit on what @Antoine says, using adjusted prices will be reasonable from a returns point of view, with dividends reinvested.
That point, dividend reinvestment, is ...
- 14.6k
7
votes
Intuition for Stock Price Numeraire Drift
I have a take on the intuition part of the question. Isn't it a simple consequence of Jensen's inequality? Thus, assuming $r=0$ for simplicity, we have in the money market measure: $E(S_T)=S_t$, ...
- 15.5k
Only top scored, non community-wiki answers of a minimum length are eligible