Option Pricing Model in Illiquid Markets
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Black-Scholes-Merton (BSM) is an option pricing model for valuing European options. It was developed in the 1970s by Fisher Black, Myron Scholes, and Robert Merton, who were awarded t…
Machine Learning for Derivative Pricing and Crash Prediction
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Applications of machine learning in finance continue to evolve rapidly. In previous issues, we discussed both the uses and the challenges of applying machine learn…
Entropy-Based Regime Detection of Tail Risks
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Identifying market regimes is particularly important in portfolio and risk management. Typically, markets are classified as bullish or bearish, or as being in high- or low-volatil…
Options Trading Using Econometric Models
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In the financial world, time series analysis is frequently used to predict stock prices, interest rates, and currency exchange rates. Econometric models are a type of time series anal…
Improving Pairs Trading with Cluster-Based Pair Selection
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Pairs trading is a classic quantitative trading strategy. Despite its widespread use, it continues to attract research attention. A recent line of research focuses on…
Evaluating a Logistic Regression Trading Framework
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Regression is one of the oldest predictive methods used in finance and remains widely applied today. Reference [1] revisits this “simple” approach by employing logistic regr…
Lead-Lag Relationship Between the VIX Index and VIX Futures
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In a previous post, we discussed the lead-lag relationship between the volatility index, VIX, and SPX futures. In this post, we are going to look at the relationshi…
Integrating Fundamental Metrics into Pairs Trading
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Statistical arbitrage is a classic quantitative trading strategy. Its core premise relies on the assumption that two similar stocks should move broadly in tandem and, when t…
Do Options Exhibit Momentum?
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Momentum has been studied extensively across equities, commodities, and other asset classes, with well-documented evidence of cross-sectional and time-series continuation effects. More recently, …
Extreme VIX: Regime Shifts and Return Predictability
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The Volatility Index (VIX) is widely regarded as a forward-looking measure of market uncertainty and investor sentiment. Although it has been extensively studied, certain …
Pairs Trading Using the Hurst Exponent of Product
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Pairs trading is a market-neutral trading strategy that seeks to profit from the relative movements of two correlated assets. The key to pairs trading is finding two assets t…
Volume Effects in Pairs Trading Performance
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Volume is an important factor that has not been sufficiently studied in the literature, although increasing attention is now being devoted to its role. For example, we recently dis…
How Well Overfitted Trading Systems Perform Out-of-Sample?
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In-sample overfitting is a serious problem when designing trading strategies. This is because a strategy that worked well in the past may not work in the future. In …
State-Dependent Correlation Between the S&P 500 and the VIX
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It is well known that the correlation between the S&P 500 and the VIX index is negative. In fact, arbitrage and hedging strategies have been designed around this re…
Multifractality and Its Underlying Drivers in Cryptocurrency Markets
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Cryptocurrencies, like other financial time series, can be analyzed using traditional time series and econometric methods. However, they present additional…
Herding in Commodities and Cryptocurrencies
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Herding behavior has been extensively studied and is well understood in equity markets, but far less so in other asset classes such as commodities and cryptocurrencies. In this iss…
Volatility Feedback Loop in the VIX Index and Its Derivatives
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The VIX index is a measure of the stock market’s expectation of volatility over the next 30 days. The VIX futures are a derivative contract that allows traders to…
Improving Momentum Strategies with Machine Learning
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Machine learning (ML) is increasingly prominent in modern finance and is being adopted across a wide range of applications. However, using ML to extract alpha remains nontr…
Max Pain Theory in Practice
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Max pain theory is a theory that suggests that the stock price movements are influenced by the options’ expiration. The max pain theory posits that the underlying asset of an option will move in s…
Does Herding Behaviour Exist in the Commodity Markets?
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In the financial markets, herding behaviour is often exhibited by investors following the crowd and buying or selling assets based on the actions of others, rather than …
Portfolio Timing and Allocation with the Variance Risk Premium
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The volatility risk premium (VRP) refers to the systematic difference between implied volatility and subsequent realized volatility. Much of the academic literat…
Dynamic Delta Hedging with Confidence-Weighted Signals
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Delta hedging is a critical component of option portfolio management. In the research literature, most studies assume strict delta hedging, where portfolio delta is main…
Modern Pairs Trading: What Still Works and Why
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Pairs trading, or statistical arbitrage (stat arb), is a classic, well-established quantitative trading strategy, and it is still in use today. I discussed its profitability in …
So in live trading you use market-at-open order?
How to Account for Slippage in Backtesting
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Backtesting is a method used by investors to develop trading systems. It involves testing a trading system on historical data to see how it would have performed in the past. Backtes…
Modeling High-Frequency Volatility with Volume-Driven Intraday Effects
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Modeling and forecasting volatility is critically important for portfolio construction and risk management. Numerous volatility models exist, and one est…
Do Path-Independent Volatilities Exist?
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Volatility of an asset is a measure of how much the price of that asset varies over time. In other words, it is a measure of how “risky” an investment in that asset is. The higher the …
Delta Hedging Under Fractional Brownian Motion
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The Black–Scholes–Merton (BSM) model is the most frequently used option pricing framework in finance. However, it relies on simplifying assumptions, some of which are not realis…
