I don't know whether I'll be able to take advantage of these this fall, but if you have time, you should:
Measured as the standard deviation of log returns, volatility is widely regarded as a synonym for risk, and option implied volatility denotes the expected risk for an asset. However, following the economist Frank Knight‘s famous distinction between risk and uncertainty, we can ask about the events or outcomes that are not reflected in a given risk estimate. If our volatility estimate reflects the outcomes that we know might occur, what should we think about the outcomes we don’t know about,…
After the hail of fire that daring to suggest gold might be overpriced drew upon reposting my latest gold-bubble article on Seeking Alpha, I decided to stay away from writing anything that implies “value” is nothing but a social construct. But then I heard two programs on my NPR station last week that featured refreshing takes on economics, trading, markets, and the meaning of money. Seasoned investors and veteran economists might find these programs trivial—but I humbly submit that it's important to look outside the bubble to get some perspective...
When leveraged and inverse ETFs were first launched, many investors weren’t aware of the negative effects that daily rebalancing would have on the long-term performance of those ETFs relative to their benchmarks. Those potential problems are now more widely known, and coverage of leveraged and inverse products often includes the advice that they are best used as trading vehicles rather than investment products – i.e. to avoid investment shortfalls due to rebalancing effects, the holding period for positions using these…
The November issue of Expiring Monthly has a large feature section on commodity options, and I think this is the most thematically unified issue we’ve published to date. The whole issue is a good read, in my opinion, but I thought I’d mention some highlights:
In the feature article, “The Volatility Risk Premium in Commodity Options,” I explain the concept of the volatility risk premium, review some literature identifying the presence of this premium in options on commodity futures, and present some…
It is a relatively simple matter to backtest a strategy trading price-based expectations: a little spreadsheet know-how or, failing that, any of the scores of software packages now on offer will get the job done. But testing the historical performance of well-defined options strategies involves much more complexity, and imposes significantly greater data requirements. The difference between stocks/futures/forex and options is so great, in fact, that no retail platform today offers a straightforward way to run thorough tests of quantitative…
Some interesting articles have been added to the forthcoming list at Quantitative Finance. Cites and abstracts are below, with links to preprints where available. I don’t have time to add commentary at the moment, but am happy to answer questions in the comments section.
Abel Rodriguez & Enrique Ter Horst, “Measuring expectations in options markets: an application to the S&P500 index.”
Extracting market expectations has always been an important issue when making national policies and investment…
From the Wikipedia entry:
A correlation swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the observed average correlation of a collection of underlying products, where each product has periodically observable prices, as with a commodity, exchange rate, interest rate, or stock index.
…
Pricing and valuation
No industry-standard models yet exist that have stochastic correlation and are arbitrage-free.
Quants: get to work. EDIT:…
UPDATE: Thanks to everyone who attended. Here are the presentation slides. Feel free to contact me with any questions.
I’m giving a presentation tomorrow evening. Attendance is free.
Risks Taken Unintentionally: Volatility and the Lessons of the 2008 Financial Crisis
Tuesday, November 24, 2009, 9:00PM ET
http://joinwebinar.com/
Webinar ID: 736952386
Topics to be covered include the equity risk premium, the variance risk premium, and six lessons to be learned from the financial crisis. The…
M. Levy, “Loss aversion and the price of risk,” Quantitative Finance (forthcoming):
Abstract: This paper derives a simple theoretical relationship between the degree of loss aversion, the concavity/convexity of the value function, and the equilibrium market price of risk. We show that while the degree of loss aversion is key in determining the market price of risk, the convexity/concavity of the value function is much less important in this respect. The theoretical relationship obtained is tested…
Wednesday, September 12, 2012
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