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10 votes

If the spread between two assets is an OU process, what processes do the two assets follow?

If we allow the mean reversion speeds to be identical, we could assume OU processes for the two components: Let $$ \begin{align} dx_1&=\kappa_1(\theta_1-x_1)dt+\sigma_1dW_1\\ dx_2&=\kappa_2(\...
Kermittfrog's user avatar
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10 votes
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How to Bloomberg compute the implied Yield ? What is FX swap basis spread?

1 ) The value 1.062732 is the Forward outright as quoted on FRD. Your pricing source is BGN (Bloomberg Generic New York). That ...
AKdemy's user avatar
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7 votes
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How to trade interest rate futures calendar spread?

Trading bond futures calendar spread is actually a very involved exercise, with many moving parts. But first things first, recall that bond futures price is approximately: $$ F = \text{spot price} - \...
Helin's user avatar
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7 votes

What causes the spread between WTI and Brent

There are quite few factors that lead to the WTI vs. Brent Crude spread. Firstly in oil trading there are many different types of crude oil grades traded around the world. However, the most popular ...
RK1's user avatar
  • 181
7 votes

Downward Sloping Swap Spread Curve

If I look at the market I think this is mainly driven by the very nature of the long end investors of the swap curve. Compared to govi curves the swap curves provides a much better liquidity in longer ...
math's user avatar
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7 votes

Intuition behind calendar spread max loss

This is not necessarily true. Take a high dividend paying stock (10%) for example. If deep ITM, you would have a loss higher than the initial cost for european options, or face an early exercise for ...
AKdemy's user avatar
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6 votes
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Theoretical models for options bid-ask spread?

When trading options it is most useful to think in terms of implied volatilities, rather than option prices. For vanilla options, there is a one-to-one relationship between implied volatility and ...
Chris Taylor's user avatar
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6 votes

What causes the spread between WTI and Brent

Pipeline constraints have resulted in a build up of stock in Texas. The high supply and constraints in exporting result in a spread between WTI and Brent. Determining an upper bound on this spread is ...
Trevor Hansen's user avatar
6 votes

Relation between ATM, RR and BF

The ATM is an outright position (long 50 delta put and 50 delta call) so the main exposure is vega. It is the riskiest of the three, and demands a higher bid-offer spread from market makers to ...
Chris Taylor's user avatar
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6 votes
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Corwin-Schultz estimator of bid-ask spread

If you have access to intraday data, they are better ways to estimate the bid-ask spread. If you have Open, High, Low and Close price on each 5min bin $b$ (or any other interval): the Close of the ...
lehalle's user avatar
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6 votes

Do MarketOnClose orders cross a bid-ask spread?

A simpler way to debunk these studies without having actual trade and quote data at the exchange level is to just take into account transaction costs, IBKR's half a penny per share is a good starting ...
pyCthon's user avatar
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5 votes

Why is G spread bigger than Z spread theoretically?

Tough to answer specifically because I don't know what bonds you're looking at, but my guess is it has less to do with the spread-building blocks and more to do with the base curve. G spread is based ...
Benloper's user avatar
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5 votes

Pair trading - short / long the spread

first keep in mind how spread is constructed, say it's $y - \beta x$, $y$ being asset $A$'s price and $x$ being that of asset $B$. Then long the spread is when $A$ is under-performing, because our ...
numerairX's user avatar
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Pair trading - short / long the spread

From the link in your OP, the article is talking about buying one stock versus shorting the other. The distance pair trading system they are describing always plays the distance to converge. It just ...
amdopt's user avatar
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Why there is no Bid Ask Spread in Futures Markets?

There is usually always at least 1-tick spread. I used to trade Bund and Treasury futures: For example there could be 500 bids for Bund futures at price 173.11, 800 at price 173.10, whilst there are ...
Jan Stuller's user avatar
  • 6,118
4 votes

FOREX: why does SPREAD peak at 22:00 gmt

International banks will pass their trading from one centre to the next, so London hands over to NY, which hands over to Tokyo etc. When a centre takes the reins, they may not want to keep the same ...
Phil H's user avatar
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4 votes
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Total Return Swaps and Borrow Cost Relationship

These total return swaps are basically funding trades. The seller of total return is putting the risk on their balance sheet. In order to pay the total return to the buyer of total return, the ...
AlRacoon's user avatar
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4 votes

Good References for Treasury Futures Spreads

Im interested in this topic myself. I haven't found anything of a good standard yet. However, there are some pamphlets from CME that could be useful as an initial exploration. I will keep looking and ...
hernanavella's user avatar
4 votes
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Bid-Ask spread in Roll's model: Negative autocovariance of returns and informational content

This does not imply overestimation bias. We expect a negative autocorrelation in high- and ultra-high-frequency (every trade) data due to bid-ask bounce. Bounce occurs when buy and sell orders trading ...
kurtosis's user avatar
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4 votes

Pair trading - short / long the spread

There's 2 ways to remember the sign convention: If you're trading an exchange-listed spread, then the convention is that going long on the spread A-B implies buying A and selling B. Vice versa, ...
madilyn's user avatar
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4 votes
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Trading inside/ outside the spread

Consider this schematic of the bid-ask spread. Now think about a trade happening somewhere on the horizontal line. When would you say it's inside or outside? How can a trade be in the outside area?
Bob Jansen's user avatar
  • 8,562
4 votes

Why there is no Bid Ask Spread in Futures Markets?

This is incorrect. There is always a bid/ask spread in futures markets. Futures are different from equities in that there is only one market that can trade them. That guarantees that there is one ...
JoshK's user avatar
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4 votes

Why do E-mini S&P 500 futures have small bid-ask spreads?

Lots of market participants - yes. It is the ultimate hedge and/or place to express your broad market views. While RTY may be a broader market index, in practice the 500 is probably a better proxy ...
Bikenfly's user avatar
  • 454
4 votes

Downward Sloping Swap Spread Curve

This post is more related to EM markets, rather than developed markets (so could add some additional examples, to the already good DM examples given by @math above): (i) In some countries (for example ...
Jan Stuller's user avatar
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4 votes
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How does this formula for the price of a bond in terms of forward rates work?

Assume today is $t$, and the 1st coupon pays at time $T_1$, the 2nd one at $T_2$, etc. Then your term structure of spot rates would be $R_1 = R(T_1) = f(t,T_1)$ for the 1st maturity, and $R_2 = R(T_2)$...
KevinT's user avatar
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4 votes

Survival probabilities starting from CDS spreads

OK, here is a simplified demonstration: Before we consider swaps, let us consider very simple bonds. Suppose that you have a choice of two zero-coupon bonds. A riskless one costs 95 and is certain to ...
Dimitri Vulis's user avatar
4 votes
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Is there a mathematical relationship between the spread on a collection of individual assets and the spread of a portfolio?

You need to define what you mean by the portfolio spread. Here I define it as if the portfolio is itself a single bond and you want to calculate its yield spread over the risk-free rate $r$. Here I ...
Dom's user avatar
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4 votes
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Do MarketOnClose orders cross a bid-ask spread?

A market on close order is usually an order that is reversed for the closing auction. When such orders not designed by exchanges, brokers are emulating them. For instance, if an exchange does not ...
lehalle's user avatar
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4 votes
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Incorporating the I-Spread and Parallel Shift for Accurate Bond Pricing

This is probably a question that should be addressed by the Helpdesk. Anyways, in terms of your questions: The SOFR curve is indeed constructed using swap rates, from very short dated weekly swaps to ...
oronimbus's user avatar
  • 1,896
3 votes

Why the spread is calculated on raw prices instead on the price changes?

That is the concept of Cointegration Regressing two non-stationary variables results in spurious regression. However, if these two variables are cointegrated, spurious regression no longer arises. As ...
skoestlmeier's user avatar
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