Credit value adjustment (CVA) is a financial concept used to account for the potential loss in value of a portfolio due to counterparty credit risk. Essentially, CVA reflects the difference between the risk-free portfolio value and the true portfolio value, considering the possibility of counterparty default. It’s a critical component …

In a previous post, we discussed a theoretical model for studying the effectiveness of stop losses. In this post, we will present an empirical study of their efficacy in the commodity market. Reference examined how fixed and trailing stop losses perform in this market. The authors pointed out, This …

Time series models like ARIMA, or Autoregressive Integrated Moving Average, and VAR, or Vector Autoregression, are essential tools for forecasting sequential data points over time, making them invaluable for investment analysis and decision-making. These models can capture and analyze historical patterns and trends in financial markets, helping investors identify potential …

Covariance plays an important role in portfolio construction as it measures the relationship between the returns of different assets in a portfolio. Understanding covariance helps investors to diversify their investments effectively by selecting assets that are not highly correlated with each other. Covariance also allows investors to assess the impact …

Recently, equity market indices have been hitting new all-time highs. Some traders are even expressing frustration, claiming the markets are irrational and predicting a correction. Are investors overreacting in this market and pushing the indices higher? Reference examined the investor overreaction. The study is grounded in the widely recognized …

A stop loss serves as a risk management tool, helping investors limit potential losses by automatically triggering the sale of a security when its price reaches a predetermined level. This level is set below the purchase price for long positions and above the purchase price for short positions. By implementing …

Moving averages are a useful tool in investing. They smooth out price data over a specific period, providing a clearer trend perspective. The most common types are the simple moving average (SMA) and the exponential moving average (EMA). Investors often use moving averages to identify trends and filter out short-term …

In 1993, the Chicago Board Options Exchange (CBOE) launched the Volatility Index (VIX), which became a crucial gauge for expected short-term market volatility. It serves as the foundation for trading volatility futures and portfolio hedging. Initially, the VIX was model-dependent and applied to the S&P100. Then, the CBOE developed a …

The VIX, developed by Robert Whaley in 1993, represents implied volatility with a fixed 30-day maturity and is quoted annually. Originally designed as a model-based IV index on the S&P 100, its purpose is to serve as a foundation for trading volatility derivatives. These derivatives are valuable for hedging portfolios …

In previous posts, we discussed the momentum phenomena in the options market. In essence, evidence suggests that delta-hedged straddle option positions exhibit momentum. This means that firms whose options performed well in the past 6 to 36 months are likely to experience high option returns in the next month. Reference …