Product Confusion: Why Retail Investors Lose Money in VIX ETPs

Posted on June 12, 2025 By Harbourfront Technologies

Behavioral finance has studied why retail investors lose money. We discussed one such study in a previous post. Retail investor losses can be attributed to, among other factors, overconfidence, overtrading, sensation seeking, issuers’ overpricing, etc. Reference observed that in the VIX ETP space, retail investors experienced an annualized return …

Using Random-Maturity Arbitrage to Price Perpetual Futures

Posted on June 8, 2025 By Harbourfront Technologies

Traditional futures contracts have maturity dates, upon which the futures price converges to the spot price. In the cryptocurrency market, the most popular contracts do not have a maturity date. They’re called perpetual contracts. Unlike fixed-maturity futures, perpetuals do not expire. This feature enhances the liquidity of the contract. Because …

Speeding Up Derivatives Pricing Using Machine Learning

Posted on June 4, 2025 By Harbourfront Technologies

A financial derivative is a financial contract whose value depends on the price of an underlying asset such as a stock, bond, commodity, or index. Accurate valuation of financial derivatives and their associated sensitivity factors is important for both investment and hedging purposes. However, many complex derivatives exhibit path-dependency and …

Leveraged ETFs: Do They Really Decay?

Posted on May 31, 2025 By Harbourfront Technologies

Leveraged ETFs (LETFs) are financial instruments designed to amplify the daily returns of an underlying index, typically by a factor of two or three. They have received criticism for performance drag or value erosion over time. Despite these concerns, they continue to attract attention and capital from investors. A recent …

Crypto Treasury Models: Balance Sheet Risk and Bitcoin Price Dependency

Posted on May 27, 2025 By Harbourfront Technologies

As crypto currencies gain broader acceptance, some corporations have begun including crypto in their balance sheets, forming new “crypto treasury” models. However, these models entail significant financial risks. Digital asset price volatility can translate into earnings variability and elevated refinancing risk—effects that are amplified when acquisitions are debt-financed. Reference …

Risk, Timing, and Strategy: Key Differences in 0DTE Options Trading Styles

Posted on May 23, 2025 By Harbourfront Technologies

We have discussed the impact of 0DTE options on the market, drawing from both practitioner insights and academic literature. Both sources point to the conclusion that 0DTE options have little or almost no impact on the market; they do not increase market volatility, contrary to what many investors have argued. …

Market Regimes and Strike Selection: A Case Study on the Call Condor

Posted on May 19, 2025 By Harbourfront Technologies

Parameter optimization is a technique used in trading strategy design. It is used to identify the best set of parameters for maximizing performance and to study the strategy dynamics in order to gain insights. However, while this technique is frequently applied to linear instruments, it is used less often on …

Trend vs. Mean Reversion: A Statistical Physics Approach to Financial Markets

Posted on May 15, 2025 By Harbourfront Technologies

Trend and mean reversion are two prevalent forces in financial markets. Studying their interplay is important, as it provides clues for developing accurate timing models. Reference formally examines the relationship between trend and mean reversion in financial markets, across timeframes ranging from intraday to monthly, and spanning over 300 …

Forecasting Volatility in Digital Assets: A Comparative Study

Posted on May 11, 2025 By Harbourfront Technologies

Modeling the volatility of cryptocurrencies is important for understanding and managing risk in these markets. Reference provides a literature review of various volatility prediction approaches and evaluates three models: GARCH, EGARCH, and EWMA. The EGARCH model is an extension of the GARCH model that accounts for the asymmetric impact …

Joint Calibration of SPX and VIX Options Using the Willow Tree Method

Posted on May 7, 2025 By Harbourfront Technologies

The willow tree method is a powerful technique with many applications in derivative pricing. We have discussed how it can be used to determine the implied volatilities of American options. It can also be applied to price convertible bonds by simultaneously accounting for equity and credit risks. In addition, it …