Predicting Volatility Risk Premium Through Sector Implied Correlation

Posted on July 4, 2021 By Harbourfront Technologies

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 …

Volatility Term Structure of the DAX Index

Posted on June 20, 2021 By Harbourfront Technologies

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 …

Does Intraday Momentum Exist in Stock Indices?

Posted on June 14, 2021 By Harbourfront Technologies

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 answers this question. It examined the time-series momentum of …

Does Trend Following Work on Single-Name Stocks?

Posted on June 9, 2021 By Harbourfront Technologies

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 …

Why and How Systematic Trading Strategies Decay After Going Live

Posted on June 4, 2021 By Harbourfront Technologies

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 …

What Are the Correct Methods for Evaluating a Trading Strategy?

Posted on May 30, 2021 By Harbourfront Technologies

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 , however, argued that using a traditional …

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

Posted on May 26, 2021 By Harbourfront Technologies

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 …

How Retail Trading Affects Stock Market Volatility and Trading Strategies

Posted on May 19, 2021 By Harbourfront Technologies

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 examined the impact of retail trading on the market during the pandemic. It uses Robinhood traders as the …

Valuation of European Options with Stochastic Interest Rates and Transaction Costs

Posted on May 12, 2021 By Harbourfront Technologies

Black-Scholes-Merton (BSM) is a celebrated option pricing model that is used frequently in the financial industry . 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 …

Overlaying Options Spreads on a Technical Trading Strategy

Posted on May 5, 2021 By Harbourfront Technologies

Options are complex financial instruments that often attract sophisticated traders and investors. In investment banks and hedge funds, they’re often the instrument of choice when one wants to engage in sophisticated trading strategies such as volatility arbitrage, dispersion trading. Another important role of options is for hedging and risk management …