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Free Courses in Finance and Programming

Wednesday, September 12, 2012

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I don't know whether I'll be able to take advantage of these this fall, but if you have time, you should:

Fear of the Unknown: Volatility of Volatility Predicts Stock Returns

Monday, August 27, 2012


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,…

Investors Still Haven’t Understood Leveraged ETFs

Monday, November 29, 2010

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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…

Expiring Monthly on Commodities

Tuesday, November 23, 2010

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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…

Backtesting Options Trading Strategies

Monday, April 12, 2010


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…

New Research: Sentiment, Expectations, and Stat Arb

Wednesday, January 6, 2010


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…

Exciting Arbitrage Opportunity

Tuesday, December 15, 2009


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:…

Webinar: Volatility and the Lessons of the 2008 Financial Crisis

Monday, November 23, 2009


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 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…

Loss Aversion, Behavioral Finance, and the Asymmetry of Volatility and Returns

Wednesday, November 11, 2009


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…

Should You Be Buying or Selling Options?

Tuesday, October 20, 2009


Hayne E. Leland, “Options and Expectations,” UC-Berkeley Research Program in Finance Working Paper RPF-267, October 1996. Abstract: Who should buy options (ordinary or “exotic”), and who should sell? Buyers and sellers must differ from the average investor, who will not undertake options positions. We develop a simple binomial model to characterize the expectations (relative to the average or consensus) which must be held by investors to justify buying or selling various types of derivatives, or following dynamic…

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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