We have previously presented time series analysis for identifying autocorrelation properties of stock indices and econometric techniques such as ARIMA and GARCH for estimating volatilities. We also highlighted an article  that demonstrated the usefulness of advanced volatility estimators in trading by reducing trading strategies’ turnover. On the same topic, Reference  attempted to directly…Read More Are Econometric Models Useful in Trading?
Bitcoin was born as a niche investment vehicle, but over time it has become a mainstream asset. Many research papers have been devoted to developing trading strategies for Bitcoin, but we just recently came across one  that examined the PnL/risk driver in terms of autocorrelations and developed trading systems accordingly. Specifically, the paper investigated…Read More Trading Strategies Based on Autocorrelation Properties of Bitcoin
A financial option is a rather complex instrument. Unlike delta-one products, an option value depends not only on the underlying, but also on volatility, time to maturity, strike, interest rate, and dividends. Options have been used as hedging instruments, but they’re becoming a speculative vehicle these days thanks to a growing number of retail traders…Read More Stop Losses in Options Trading
Pairs trading is a classic “market-neutral” trading strategy. Previously, we highlighted an article that claims that cointegration is a superior method for selecting pairs . On the same topic, Reference  examined more pair selection methods. Specifically, it investigated the following approaches, Distance: Pairs are identified by using distance metrics. This is perhaps the simplest…Read More Is Cointegration the Best Method for Pairs Trading?
The arbitrage principle is one of the cornerstones of modern finance, and it’s being used widely, from derivative pricing to hedging, trading, and risk management. Theoretically, there is only one arbitrage principle. Practically, however, there are other types of arbitrage, some of which are relaxed forms of the strictest one. Reference  examined two seemingly…Read More Do Arbitrage Opportunities Still Exist?
Volatility estimators are a useful tool in volatility trading and risk management. We have discussed several types of volatility estimators, ranging from the simple Close-to-Close Historical Volatility to more complex ones like the Garman-Klass-Yang-Zhang volatility. As discussed in Reference , volatility estimators can also be used directly in delta-one trading by Commodity Trading Advisors. The…Read More An Application of Volatility Estimators
Accounting numbers are prevalent in financial reporting, business valuation, and investment management. They’re so frequently used that the practitioners rarely asked pragmatic questions such as: are they useful, do they account for some meaningful risks, can they be used to price assets. A recent article  attempts to bring some answers to these questions, This…Read More Are Accounting Numbers Useful?
Convertible bonds are complex securities that are part debt, part equity. The main feature of a convertible bond is the conversion that allows the bondholder to convert debt to equity. In addition, there can be many other “exotic” features such as callable, puttable, forced conversion, soft call, contingent conversion, etc. Given their complexities, convertible bonds’…Read More Pricing Convertible Bonds Using Monte-Carlo Simulations
Options market efficiency is a topic of interest not only to academics but also to practitioners. There is a body of research focusing on market inefficiency. For example, we recently highlighted a research paper dealing with sector ETFs’ implied volatilities and correlations. The research result implies that the options market is not efficient, as one…Read More Are Index Options Markets Efficient?
We previously demonstrated that stock indices exhibit mean-reverting property in the short term and trending property in the long term. Reference  further explored the trending/mean-reverting properties in a longer timeframe and pointed out that in the very long term, the markets mean-revert, We provide further evidence that markets trend on the medium term (months)…Read More Further on Trending/Mean-Reverting Properties of Stock Indices