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 …

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 (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 …

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 …

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 …

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 …

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 …

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 …

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 …

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 …