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An Options Pricing Model for Non-Frictionless Markets

Posted on May 20, 2024 By 
The traditional option pricing model assumes that the market is frictionless. However, a body of research has developed theories that do not make this assumption. Reference utilizes the Stochastic Arbitrage (SA) approach to derive price bounds within which the admissible risk-neutral option prices, which are determined by using the …
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Volatility Risk Premium Is a Reward for Bearing Overnight Risk

Posted on May 16, 2024 By 
The volatility risk premium (VRP) represents the difference between the implied volatility of options and the realized volatility of the underlying asset. Essentially, it reflects the compensation that investors demand for bearing the risk associated with the uncertainty of future volatility. Typically, implied volatility is higher than realized volatility, indicating …
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Can Hypothesis Testing Reduce Data Mining Risks?

Posted on May 12, 2024 By 
A significant challenge in designing trading strategies is the data mining problem, which arises from the vast amount of data available and the potential for spurious correlations. With an abundance of historical market data, traders may inadvertently identify patterns or relationships that appear significant but are merely coincidental. This can …
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Do Calendar Anomalies Still Exist?

Posted on May 8, 2024 By 
Calendar anomalies in the stock market refer to recurring patterns or anomalies that occur at specific times of the year, month, or week, which cannot be explained by traditional financial theories. These anomalies often defy the efficient market hypothesis and provide opportunities for investors to exploit market inefficiencies. Some well-known …
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Volatility Spillover Between Developing Markets

Posted on May 4, 2024 By 
Volatility spillover refers to the transmission of volatility shocks from one market or asset to another, leading to increased volatility in the receiving market. These spillovers can occur within the same asset class or across different asset classes. For instance, a sudden increase in volatility in one stock market may …
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Predicting Realized Volatility Using Skewness and Kurtosis

Posted on April 30, 2024 By 
Realized volatility refers to the actual volatility experienced by a financial asset over a specific period, typically computed using historical price data. By calculating realized volatility, investors and analysts can gain insights into the true level of price variability in the market, which can be valuable for risk management, portfolio …
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Is Pairs Trading Still Profitable?

Posted on April 26, 2024 By 
Pairs trading involves identifying two related securities, typically stocks, that have historically exhibited a strong correlation in price movements. Traders then look for deviations from this historical relationship, buying the underperforming security while simultaneously selling the outperforming one. The goal is to profit from the convergence of prices back to …
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A Portfolio Construction Approach Based on Options Implied Density Distributions

Posted on April 18, 2024 By 
An investment portfolio can be constructed by using momentum, minimum-variance, or mean-variance approaches. It involves combining assets in a way that optimizes risk and return. Each approach offers its own trade-offs: momentum strategies may suffer during market reversals, while minimum-variance portfolios may underperform in strongly trending markets. Meanwhile, mean-variance portfolios …
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Optimizing Portfolios Based on Hurst Exponent

Posted on April 14, 2024 By 
Portfolio optimization is an important aspect of investment management, aiming to construct portfolios that offer the best risk-return trade-off based on an investor’s objectives and constraints. Various optimization techniques, such as mean-variance optimization, Black-Litterman model, and risk parity, are employed to generate optimal portfolios tailored to different investment goals and …
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