Trading systems often experience performance deterioration after going live, largely due to overfitting. Reference formally studied this issue, using analytical approximations for the in-sample and out-of-sample Sharpe ratios of portfolios. The authors pointed out, This paper derives analytical approximations for the in-sample and out-of-sample Sharpe ratios of portfolios constructed …

Momentum in the options market is an emerging and active area of research. For example, Reference demonstrated that delta-hedged straddle positions exhibit momentum, where firms with strong option performance over the past 6 to 36 months are likely to experience high option returns in the subsequent month. Reference  …

Options, particularly short-dated ones, are gaining popularity among retail traders, with their trading volume increasing significantly. While some research argues that short-dated options do not impact the market, certain market practitioners hold opposing views. Reference investigated the risks associated with short-dated options order flow. It examined the effective trading …

Market manipulation refers to intentional actions taken to distort the normal functioning of financial markets, often to benefit specific individuals or entities at the expense of others. These actions can include spreading false information, rigging prices, or creating artificial demand or supply. A notable example is the LIBOR manipulation scandal, …

Due to technological advancements, air travel has never been safer. However, despite all these new technologies, one constant remains: the human factor. Specifically, the most critical individuals are the pilots. Unless we develop pilotless airplanes, a possibility that won’t materialize anytime soon, pilot behaviour remains essential. Do pilots maintain a …

Volatility skew refers to the observed pattern where implied volatility varies depending on the strike price of an option. Typically, in equity markets, out-of-the-money (OTM) put options exhibit higher implied volatility than at-the-money (ATM) or out-of-the-money call options. This phenomenon reflects market participants’ demand for protection against downside risks, as …

Leveraged Exchange-Traded Funds (LETFs) are financial instruments designed to amplify the daily returns of an underlying index or asset, often using derivatives and debt. Typically, LETFs aim to achieve a multiple (e.g., 2x or 3x) of the daily performance of the tracked benchmark, both on the upside and downside. LETFs …

Sometimes, investors come across trading opportunities that offer outsized returns, but they may not fully understand the risks they are taking on. These risks can include operational risks, counterparty credit risks, or hidden optionality within a financial note. Reference examines the role of liquidity risks in the returns of …

Net Gamma Exposure (NGE) and its effect on stock prices has been an active research topic recently. Reference applied this concept to the Chinese stock market, studying the NGE effect on intraday stock direction and the relationship between futures and options. Specifically, the paper presents evidence supporting the idea …

Geometric Brownian Motion (GBM) is a widely used mathematical model for simulating the random behaviour of asset prices in financial markets. It assumes that the price of an asset follows a continuous-time stochastic process, where the logarithmic returns are normally distributed. GBM is foundational in option pricing models like Black-Scholes-Merton. …