Author: Harbourfront Technologies

Further on the Profitability of Pairs Trading

Pairs trading is a market-neutral trading strategy that involves taking simultaneous long and short positions in two correlated stocks to profit from their relative price movements. There are recent research papers that argue that pairs trading is no longer profitable, especially when using traditional pairs selection methods. Reference , however, …

Skewness Risk Premium in the Options Market

Skewness of returns is a statistical measure that captures the asymmetry of the distribution of an asset’s returns over a specified period. It is particularly important in risk management and option pricing, where the skewness of returns can affect the valuation of derivatives and the construction of portfolios. Reference  …

Retail Options Traders’ Behaviour

Retail investors are individual, non-professional investors who buy and sell securities, such as stocks, options, and mutual funds, for their personal accounts rather than for an organization or institution. Unlike institutional investors, who manage large sums of money on behalf of clients or large entities, retail investors typically trade in …

Modeling Short-term Implied Volatilities in the Heston Stochastic Volatility Model

Stochastic volatility models, unlike constant volatility models, which assume a fixed level of volatility, allow volatility to change. These models, such as the Heston model, introduce an additional stochastic process to account for the variability in volatility, providing a more nuanced dynamics of the market. By incorporating factors like mean …

Realized Volatility, the Good and the Bad

Realized volatility (RV) refers to the actual movement of an asset’s price over a specific period, typically measured using high-frequency data. Unlike implied volatility, which is derived from options prices and reflects market expectations, realized volatility is computed from historical price data and provides an empirical measure of how much …

Stock Returns After Extreme Loss Events

An extreme loss event in the stock market refers to a sudden and significant decline in stock prices, often resulting from unexpected and severe market conditions. These events, also known as market crashes or financial crises, can be triggered by a variety of factors including economic downturns, geopolitical tensions, natural …

Term Structure of Expected Stock Returns

In the financial literature and media, we often encounter the concept of term structure, such as the term structure of volatility and the term structure of interest rates. Reference introduced the concept of term structure of expected stock returns. Essentially, the author utilizes options data to first calculate a …

Profitability of Cross-Sectional Momentum Strategy

Cross-sectional momentum is an investment strategy that involves ranking and selecting assets based on their past performance relative to their peers. Unlike time-series momentum, which looks at an individual asset’s past performance in isolation, cross-sectional momentum compares multiple assets to each other. Investors buy the top-performing assets and sell the …

An Options Pricing Model for Non-Frictionless Markets

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 …

Volatility Risk Premium Is a Reward for Bearing Overnight Risk

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 …