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
$$
\begin{align}
dx_1&=\kappa_1(\theta_1-x_1)dt+\sigma_1dW_1\\
dx_2&=\kappa_2(\...
- 6,470
9
votes
Accepted
How to Bloomberg compute the implied Yield ? What is FX swap basis spread?
1 ) The value 1.062732 is the Forward outright as quoted on FRD. Your pricing source is BGN (Bloomberg Generic New York). That ...
- 8,193
7
votes
Accepted
How to trade interest rate futures calendar spread?
Trading bond futures calendar spread is actually a very involved exercise, with many moving parts. But first things first, recall that bond futures price is approximately:
$$ F = \text{spot price} - \...
- 11.4k
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 ...
- 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 ...
- 1,718
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 ...
- 8,193
6
votes
Accepted
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 ...
- 5,891
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 ...
- 380
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 ...
- 5,891
6
votes
Accepted
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 ...
- 11.5k
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 ...
- 2,081
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 ...
- 151
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 ...
- 609
5
votes
Accepted
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 ...
- 4,738
5
votes
Accepted
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 ...
- 5,998
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 ...
- 3,669
4
votes
Accepted
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 ...
- 5,672
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 ...
- 355
4
votes
Accepted
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 ...
- 2,880
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, ...
- 5,231
4
votes
Accepted
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?
- 8,438
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 ...
- 2,588
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 ...
- 464
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 ...
- 5,998
4
votes
Accepted
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 $R_2 = R(T_2)$...
- 645
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 ...
- 12k
4
votes
Accepted
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 ...
- 2,137
4
votes
Accepted
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 ...
- 11.5k
4
votes
Accepted
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 ...
- 1,841
3
votes
FOREX: why does SPREAD peak at 22:00 gmt
22 GMT is 5pm nyc.
Thats the time when all the ECNs and liquidity providers stop operation to be restated at 5.30 nyc time again.
That's why you see such spreads.
Probably starts to widening at 4.30pm ...
- 425
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