There is a very interesting discussion on stackexchange on how to determine the credit risks of a startup. What would be the ideal way to develop the IFRS9 ECL model for startup fintech when there is no historical data. There are 2 answers to this question (as of November 2021) This is more of an…
Read More How to Determine Credit Risks of a StartupIn financial markets, the logarithms of asset prices are often modeled as a normal distribution. Elsewhere in life, many things are normally distributed: people’s height, education levels, talents, working hours in a day, etc. Success, as measured by wealth, however, is not normally distributed. In fact, it’s heavily skewed and follows the Pareto rule: 20%…
Read More Is It Better To Be Lucky Than Good?Day trading is a popular discussion topic in the practitioners’ literature, the blogosphere, and social media. It receives, however, less attention in the academic community. We have previously discussed a paper on the intraday momentum in the stock indices. Reference [1] extended the research to the oil market. It used USO, an oil ETF, 1-…
Read More Does Intraday Momentum Exist in the Crude Oil MarketPairs trading is a quantitative trading strategy that is often discussed in the academic as well as practitioners’ literature. We have written about this trading strategy extensively from different perspectives. In this post, we’re going to look at the risk/PnL drivers of the pairs trading strategy. Reference [1] pointed out that the profit of pairs…
Read More Pairs Trading Strategy-What are the Sources of Excess Returns?Portfolio hedging is a risk-management practice that uses a number of strategies to mitigate the risks of any given portfolio. Tail risk hedging in particular is one of the techniques used in equity portfolio management. It basically involves buying put options in a certain amount to partially or fully protect the portfolio. Reference [1] provided…
Read More Tail Risk Hedging Strategies: Are They Effective?A company’s book value is basically the net worth of its assets as found on the balance sheet, and it’s usually about equal to the amount that all shareholders will receive if the company liquidates and pays off all of its liabilities. Book value has been one of the most important accounting metrics used by…
Read More Are Book Values Still Useful in Value Investing?The liquidity of a stock is of concern to traders who want to execute a large order at reasonable prices without making a big impact on the market. A stock liquidity level is, however, also a factor influencing the stock expected return. Along this line, Reference [1] examined how a stock’s liquidity volatility affects its…
Read More How Liquidity of Stock Affects Its Future Expected ReturnAn option is a contract that provides its holder with the right to buy or sell an underlying asset or security. It involves a specific price before or on a predetermined date. However, it does not obligate them to do so. There are several option styles, which represent the class into which an option falls.…
Read More Bermudan Option: Definition, Example, PricingPairs trading, or statistical arbitrage, is an effective market-neutral trading strategy. Usually fundamental or quantitative analysis is used in order to determine which pairs are suitable for trading. We have previously discussed several pairs selection methods based on quantitative measures such as stock cointegration, correlation, pair distances, etc. Reference [1] introduced a new pairs selection…
Read More Using the Hurst Exponent and Stock Comovements for Pairs TradingAs discussed several times, markets can be loosely divided into two regimes: trending, and mean-reverting. The majority of trading literature has been devoted to exploiting these market characteristics. Less attention, however, is paid to the explanation of their existence. They are often attributed to investors’ over-, underreaction and/or market inefficiencies. Reference [1] looked at these…
Read More How Options Imbalances Affect Price Dynamics