ARTICLES

We previously discussed implied dividend yield and how to extract it from traded financial instruments. Given that dividend is considered a cash payment the shareholder receives when holding a stock, naturally one would think that dividend yield can only be zero or positive. We recently, however,  worked with a client whose implied dividend yield is…

Read More Can Dividend Yield Be Negative?

The volatility risk premium is a common phenomenon that exists in the volatility space. It is often defined as a stock’s or index’s implied volatility (IV) minus its realized volatility (RV). For equity indices, over the long term IV is generally greater than RV, thus giving rise to the popularity of short volatility trading strategies.…

Read More Predicting Volatility Risk Premium Through Sector Implied Correlation

Volatility term structure is believed to be a common phenomenon across asset classes. In equity indices, it’s well-known that implied volatility (IV) is generally greater than realized volatility (RV) (i.e. there exists a so-called volatility risk premium), and out-of-the-money (OTM) IV is greater than at-the-money (ATM) IV (i.e. there exists a so-called volatility skew). The…

Read More Volatility Term Structure of the DAX Index

Most of the studies on time-series momentum have been performed in the daily, weekly, and monthly timeframes. Relatively less research has been conducted in the intraday timeframe. So naturally, we would ask the question: Does the momentum exist intraday? Reference [1] answers this question. It examined the time-series momentum of the SP500 index in the…

Read More Does Intraday Momentum Exist in Stock Indices?

Trend following is a popular trading strategy used by Commodity Trading Advisors (CTA) and Hedge Funds around the world. The traded assets are often futures on commodities, FX, fixed-income, and equity indices. We previously demonstrated that stock indices exhibit trending property in the long term, i.e. their returns are positively autocorrelated. We subsequently developed a…

Read More Does Trend Following Work on Single-Name Stocks?

Testing and validating a trading strategy is an important step in trading system development. It’s a commonly-known fact that a well-optimized trading strategy’s performance often deteriorates after it goes live. Thus, developing a robust strategy that performs well out-of-sample is quite a challenge. To this effect, we previously discussed a multiple testing framework for validating…

Read More Why and How Systematic Trading Strategies Decay After Going Live

The trading literature deals mostly with the design and development of trading strategies. There is very little discussion on the topic of how to properly validate them, and most of the system validation techniques have been developed under a traditional statistical framework. Article [1], however, argued that using a traditional single testing framework is not…

Read More What Are the Correct Methods for Evaluating a Trading Strategy?

Pairs trading or statistical arbitrage is a popular quantitative trading strategy. Basically, we choose a pair of assets for trading, and when the assets’ prices diverge, we bet on them to revert back to the mean. The assets are often stocks, but they can be anything, ranging from commodities, interest rate products, to exchange-traded funds.…

Read More Cointegration or Correlation, Which Method is Better for Pairs Trading?

Retail traders are often called noise, or uninformed traders as they contribute in large part to the noise in the stock market. The pandemic just accentuates this effect. A recent paper [1] examined the impact of retail trading on the market during the pandemic. It uses Robinhood traders as the proxy for retail investors and…

Read More How Retail Trading Affects Stock Market Volatility and Trading Strategies

Black-Scholes-Merton (BSM) is a celebrated option pricing model that is used frequently in the financial industry [1]. The model was developed initially for equity options but then has been extended to many asset classes. It is so frequently used, to the point that the practitioners almost do not pay attention to the underlying assumptions of…

Read More Valuation of European Options with Stochastic Interest Rates and Transaction Costs