CODE LIBRARY
Have just started organizing the code that I have written over the last 12 months. Sourceforge is the best thing to use for such purposes. Here is the link to 100 odd classes that I written for pricing derivatives. Need to comment Finite Difference code and upload it . May be I will do it over the labor day weekend.
Link to my QuantFin Library : Source Forge:Quantitative Finance C++ Library
An option writer needs to have this plastered in his room :)
Via a comment on some blog :
“Trading isn’t about profit and loss. It’s about self-actualization. There are many ways to fulfill your potential. We happen to choose trading. And that’s not a small thing. Success and failure in this arena is beyond our control, and what’s more, it can be objectively measured, and I think that is why trading failures cause so much cognitive dissonance. We suffer so much when we lose not because we can’t handle being wrong, but because every defeat moves us one step farther away from self-actualization.
Determining whether a variable is deterministic or stochastic has been my biggest problem till date and sadly, every time I have failed in classifying . The problem arises when the variable morphs from deterministic to stochastic and back to deterministic and I have no clue how to go about it.
I think the best approach that I am following now is : Why give a damn :) Let it be any variable .as long as you make it an independent variable , life goes on :)
Thanks TP for sending me a link about this company.
Went through The Need for a New Analytic Architecture Sounds very interesting!! and exciting!!
I have always been fascinated by ants. Infact I took some time out and via kathalaya told a story to 4th class kids about ants..Here is an interesting post on swarm intelligence in NYT
How to spot the spike before the earnings announcement. Vixandmore has a detailed article
Easy in the short run, painfully DISASTROUS in the long run
In April , India announced India VIX. Obviously I have not kept track of this event for various reasons. However today when I browsed through the NSE site, I found that NSE has outlined the methodology for India VIX. It is exactly same as CBOE. There was one thing which was very disheartening, the document which outlies the procedure is a Ctrl C+ Ctrl V of the CBOE documents with author putting no effort whatsoever in taking time out in at least typing the formulae in Latex. He/She seemed to have pasted the formula as a gif/jpeg and it makes the document so ugly. It hardly takes a few minutes to write the formula in Latex and prepare a professional document.
Via Robert H. Frank - MIT Press:
“In effect, I wish to propose two different answers to the question “Does money buy happiness?” Considerable evidence suggests that if we use an increase in our incomes, as many of us do, simply to buy bigger houses and more expensive cars, then we do not end up any happier than before. But if we use an increase in our incomes to buy more of certain inconspicuous goods–such as freedom from a long commute or a stressful job–then the evidence paints a very different picture. The less we spend on conspicuous consumption goods, the better we can afford to alleviate congestion; and the more time we can devote to family and friends, to exercise, sleep, travel, and other restorative activities. On the best available evidence, reallocating our time and money in these and similar ways would result in healthier, longer– and happier–lives. "
VIX options are not based on VIX but based on VIX Futures. Why ?
Read this : Link
Wow!! There is a metric to capture Variance of analyst estimates too!!
Look at this : Coefficient Variance
This could be a good indicator, the less variance, less money you can make :)
Via Vix and more : Why I thought IV was better than beta for determining volatility (past and future), here are three reasons why I think IV is superior to beta:
Some old articles / statements are worth rereading. Here is one of my favorites:
What is Edge ?
The edge is knowing that you can fail and learn from it, and just get back up and in the game.
The edge is knowing that people think your crazy, and they are right, but you don’t care what they think.
The edge is knowing how to blow off steam a couple times a week, just so you can refocus on business
The edge is knowing that you are getting to your goals and treating people right along the way because as good as you can be, you are so focused that you need regular people around you to balance you and help you.
The edge is being able to call out someone on a business issue because you know you have done your homework.
The edge is recognizing when you are wrong, and working harder to make sure it doesn’t happen again.
The edge is being able to drill down and identify issues and problems and solve them before anyone knows they are there.
The edge is knowing that while everyone else is talking about nonsense like the will to win, and how they know they can be successful, you are preparing yourself to compete so that you will be successful.
Life is a fucking joke, which i don’t get it :(
We need volatilty based trading instruments , the more the better. WHY?
Well, if one thinks of options written, all the delta hedges based on Blackscholes break down if the volatility is a stochastic process. If Vol is a function of spot and time, it is fine, but most of the cases , one cannot assume that. So, if delta hedge of Black Scholes world is useless, what can one do ? Look for volatility based trading instruments like VIX and then delta hedge it.
I guess it is not all that bad a tool, for a 3 day effort . I had to get this up and running - rails-postgres-gruff , for that is the only way I can think of analyzing why long shorts on a massive portfolio are not converging. Now that I have got a microscope in hand, hopfully it will be fun to look at individual stock level Mean reversion processes and learn what the hell happened in Jan - Mar 08.
My philosophy of PR is summed up in six words: be amazing, be everywhere, be real.
- Jason Calcanis ( Mahalo Founder)
If one looks around, there are a tons of innovations happening in the financial sector.
All the above should have made the investors more wise and made the markets efficient, less volatile. However we are seeing the markets becoming more volatile, more manias , more structurally inefficient products being traded,..Does it sound like an irony ? Well, this book sets out to explain WHY ? The author has been a trader in MorganStanley , Smith Barney, LTCM, and has worked on a host of significant roles that his view can be understood not from a passive spectator narration of somebody but from a perspective of a player in the market. This means that it will be more - matter of fact - rather than color it from journalist flavor.
This is the second post on this book which will try to summarize the chapters on Hedge funds from this book.
Brave new world of Hedge Funds
Hedge funds exploded in to the financial world in the recent years. There are various types of hedge funds, classic one being top down. A few nice take aways from this chapter is the discussion of tulip mania where the author reasons that the existence and flourishing of futures market was the reason for speculative mania. Also a discussion of the importance of float in the market is discussed in the context of Internet bubble.
The biggest takeaway from this chapter is the answer to the following : Why does the price move ? It moves because of liquidity. Unlike the MBA crap that information moves price, this explanation is nifty . Broker dealers provide liquidity to the clients and they trade in suck liquidity. Elegant view to look at intra day price movements.
The author talks about the rise of pairs trading technique, relative value trades, LTCM and the recent evolution of long/short portfolios . I never knew that Bamberger from Morgan Stanley was the actual brain child between Pairs trading and Tartaglia stole it and scaled it .
I was rereading Paul Graham’s article and these words made a lot of sense AGAIN.
One of the best tricks I learned during our startup was a rule for deciding who to hire. Could you describe the person as an animal? It might be hard to translate that into another language, but I think everyone in the US knows what it means. It means someone who takes their work a little too seriously; someone who does what they do so well that they pass right through professional and cross over into obsessive.
If you ever want to analyze data using charts , and , excel -data interaction becomes overwhelming, then one needs to write one’s own charting infra..I was in a similar position where excel based charts were not enough for my analysis. There was simply too much data to look at and hence ended up writing my own diagnostic tool using rails-postgres . Gruff a charting library for rails proved to be INVALUABLE.
Q) What were the recent changes to the Dow Composition ?
Deletions : Kodak, International Paper, and AT&T
Addition : Pfizer, AIG, and Verizon.
About 33,300 finance jobs in New York City, or 7.1 percent of the 2007 peak, will be cut by June 2009, the Independent Budget Office, a non-partisan monitor of city finances, estimated in a May report.
Heard of CDBaby.com . If you are music fan, you would have ..Here are a few stats which make the site real cool : ($84 M of real value to the artists..wow!!)
# 244,574 artists sell their music at CD Baby
# 4,606,776 CDs sold online to customers
# $84,085,098 paid directly to the artists
Something interesting on their site -:)
# Our servers are running Linux, Apache, PHP, and MySQL.
# No Microsoft products were used in the creating of this website.
Theta: Do American Options have positive theta /time decay ? If Yes , Why ? If No, Why not ?
Related question:
Give an example of a situation where you have postive time decay in european case ?
I have a problem with Ruby. It is a great language , extremely good for fast prototyping. However this is not the language I use it daily. However, there are times when I have to use ruby where the effort of doing something in a different language is not worth it.
My problem stems from the fact that I forget the syntax as I don’t use it regularly. In the last 1 year , I would have probably worked on 4 RoR mini-projects and in every instance I had to pain stakingly go through and review the syntax . This time again I have to develop a diagnostic tool, very very fast and I don’t have time to go through the syntax at leisure. I did something different. Picked up this book “Making use of Ruby” and put myself a time limit of 30 minutes for reviewing the relevant syntax..All I can say, is that, the result is pretty good…In 1/2 hr time, one can review the syntax of loops, classes, namespaces, mixins, file operations , instantiations, arrays, hash etc and I must say this book is pretty well organized in that sense. First 120 pages is that would be needed for quick prototyping.
The trading strategy that I have been trying to back test does very badly in one fortnight. Huge drawdown!
Have been trying to figure out an answer to the question ? why? Hoping to find an answer soon.
It is a beautiful day outside, a little drizzle which I can see from my window, a silence which allows a mind to clearly think and reflect. I don’t have to go to work today.I don’t have to think of bug fixing, deadlines, work allocation, assignments, grading, etc for ONE day. What can I think of doing in the coming 24 hours ? Sometimes the feeling of having 24 hours to yourself is quite liberating.
Another difference which one can keep in mind to understand the philosophical difference between Bayes and Fischer’s way.
In the context of parameter estimation,
Bayes World : Parameter is random and credible intervals are fixed and one talks about the probability that estimator is present in that interval.Probability being referred to the posterior probability of the parameter
Fischer’s world : Parameter is constant and confidence intervals are not fixed. For example 90% confidence interval means, if a large number of independent 90% confidence intervals are constructed, then approximately 90% of them will have the true parameter.
If a trading strategy makes money continously for the last 6 years with 40% annualized return, what should I make out of it ? Is it really that GEM of a strategy OR is it a BUG in my code and I am living in a fantasy world. Have been struggling for the past 4 days. Hope to answer the question soon. I don’t wish anything as of now..Just want to see some correct numbers, even if the numbers turn out to fantastic or pathetic :)
By Endurance, we Conquer - Ernest Shackleton
Via FT:
The New York Stock Exchange is responding to the sharp rise in algorithmic trading by introducing technology designed to give NYSE floor brokers the ability to trade algorithmically and more easily locate large sources of liquidity.
Algorithmic trading uses mathematical models as a means of trading large blocks of shares quickly. Tabb Group, the US consultancy, predicts that by 2010 algorithmic trading will account for half of all US equity trading. Floor brokers will also be able to search for deep liquidity by broadcasting and subscribing to specific stocks in which they have a large interest.
Via Raghu :
“He that hath wife and children hath given hostages to fortune; for they are impediments to great enterprises, either of virtue or mischief.”
Francis Bacon (1561-1626).
For some reasons, I just couldn’t take out time for blogging..Hope to restore my default settings :)
“Ease yourself into the language. Don’t feel you have to use all of the features, and don’t try to use them all on the first day.”
- Bjarne Stroustrup on C++
The clouded mind sees nothing
Mitchell Baker on his experience at Firefox(record for the highest no of downloads in 24 hrs - 8 Million):
“Every once in a while — for those people who are really lucky — we get to experience a moment where everything comes together. A period where dreams and hard work merge together with remarkable results.
This is such a time for Mozilla.
It’s based on hard work and execution of course. The number of people who have done something unexpected in the last few months, something that changes the outcome, is very high. But that’s only part of it. And there are plenty of times in life — most of life for most people, in fact — where people work hard and pour themselves into their effort but don’t experience the lift and buoyancy of sense of validation.
The stock (PETROLEO BRASILEIRO) and its relevant ETF(MSCI BRAZIL) is a great example of mean reverting stock with respect to its ETF. Here is the yahoo chart : Mean Reversion
If one looks carefully, one can definitely find a lot of stocks where the residuals mean reverts…But the challenge is to do it on a large number of stocks quickly…Why should one do that ? Even you get beaten on one mean reversion trend , you are always safe, thanks to Law of large numbers.
Understanding a theory means Understanding it as an attempt to solve a certain problem
-- Sir Karl Pooper
Simple ideas are usually very powerful. “Pairs trading” is based on one such simple but powerful idea which generated millions in profits for various firms. Morgan Stanley which first implemented this strategy and a host of other firms which copied this technique and made a lot of money.
Pairs trading is based on 2 constructs :
First, Any stock moves in a random way , however there is a systematic component to it and idiosyncratic component. In simple terms , there is a component you can identify with a set of factors , and there is another component which is stock specific. So, you can pick a pair of stocks such that the systematic component of one stock is related to the systematic component of another stock.. Thus you have a grip on the spread.
Consistency is the last refuge of the unimaginative. - Oscar Wilde
The intellectual effort in writing a medium sized program is probably comparable to writing a book, except you never need to debug a book! There is a joy to finding out new ways to make something happen, or solving a particularly thorny problem. - David Bolton
The Fringe Benefits of Failure, and the Importance of Imagination
President Faust, members of the Harvard Corporation and the Board of Overseers, members of the faculty, proud parents, and, above all, graduates.
The first thing I would like to say is ’thank you.’ Not only has Harvard given me an extraordinary honour, but the weeks of fear and nausea I’ve experienced at the thought of giving this commencement address have made me lose weight. A win-win situation! Now all I have to do is take deep breaths, squint at the red banners and fool myself into believing I am at the world’s best-educated Harry Potter convention.
The highlight of the book is the following statement :
Any model should consider the following :
and the objective of a investment strategy should be minimize first two, maximize third and work around the fourth. Liquidity and Taxes are the additional elements to make any model realistic.
Coming back to what the book is all about,
It is about Alpha, a term used to represent , excess of benchmark returns generated by a fund manager. This book talks about the eternal quest for alpha and poses a lot of interesting questions. It begins with a history of passive indexing strategy and then tries to bring out various perspectives for seeking alpha. Ross’s APT, Markowtiz Portfolio theory, Sharpe’s contribution, Tobin’s Separation theorem are some of the historical aspects which the author brings out in a conversational mode. The rise of managed futures , behavioral finance, quant jocks , var and the hype around it, etc are highlighted in the book.
The highlight of the book is the following statement :
Any model should consider the following :
and the objective of a investment strategy should be minimize first two, maximize third and work around the fourth. Liquidity and Taxes are the additional elements to make any model realistic.
Coming back to what the book is all about,
It is about Alpha, a term used to represent , excess of benchmark returns generated by a fund manager. This book talks about the eternal quest for alpha and poses a lot of interesting questions. It begins with a history of passive indexing strategy and then tries to bring out various perspectives for seeking alpha. Ross’s APT, Markowtiz Portfolio theory, Sharpe’s contribution, Tobin’s Separation theorem are some of the historical aspects which the author brings out in a conversational mode. The rise of managed futures , behavioral finance, quant jocks , var and the hype around it, etc are highlighted in the book.
