by Jonathan Chiu Daniel Wijaya Lukman Kourosh Modarresi Avinayan Senthi Velayutham
Abstract : Statistical pair trading is a strategy used by many hedge funds,investment banks, and other investors and traders. Using two assets that have beenhistorically traded at a narrow range of spread, when the spread widens one opens aposition on the pair. That trading position includes shorting (selling) the asset withprice gain and going long (buying) the asset with depreciated price. When the spreadretreats to its mean or a threshold close to that, the trading position is closed and aprot is earned. In this project, we develop a pair trading strategy using the spreadmodel which is an OU process.
Marco Avellaneda & Sasha Stoikov We study a stock dealerâ€™s strategy for submitting bid and ask quotes in a limit order book. The agent faces an inventory risk due to the diffusive nature of the stockâ€™s mid-price and a transactions risk due to a Poisson arrival of market buy and sell orders. After setting up the agentâ€™s problem in a maximal expected utility framework, we derive the solution in a two step procedure. First, the dealer computes a personal indifference valuation for the stock, given his current inventory. Second, he calibrates his bid and ask quotes to the marketâ€™s limit order book. We compare this â€ťinventory-basedâ€ť strategy to a â€ťnaiveâ€ť best bid/best ask strategy by simulating stock price paths and displaying the P&L profiles of both strategies. We find that our strategy has a P&L profile that has both a higher return and lower variance than the benchmark strategy.
by Cedreece Tamagushiku The purpose of this paper is to investigate the performance of three different models in the pricing of call options on ninety-day bank bill futures traded on the Sydney Futures Exchange between 1993 and 2000. The three models analysed are embedded into the Heath, Jarrow, and Morton framework namely; the one, two, and three factor models. Principal Components Analysis was applied in order to provide the forward rate volatility functions necessary to implement several popular multi-factor versions of the Heath, Jarrow, and Morton model. Results showed that the three-factor model consistently outperforms the one and two-factor models. Also the pricing errors are positively correlated with the time to maturity of the option and that no real relationship existed between the errors of one and two-factor models and the date and the moneyness of the options. Although three-factor models exhibited lower errors as time progressed.
The Heston Model and the Smile, joint with Rafal Weron, Chapter contribution to the book Statistical Tools for Finance and Insurance, eds. Pavel Cizek, Wolfgang Haerdle, Rafal Weron. 2004. (e-book)
Abstract We show how several complex barrier options can be hedged using a portfolio of standard European options. These hedging strategies only involve trading at a few times during the option Discuss this paper
Peter Carr and Roger Lee Abstract Variance swaps, which pay the realized variance of [the returns on] an underlying price process, have become a leading tool for managing exposure to volatility risk. Variance options Discuss this paper
Abstract Pricing single asset American options is a hard problem in mathematical finance. There are no closed form solutions available (apart from in the case of the perpetual option), so many approximations and numerical techniques have been developed. Pricing multi Discuss this paper
ICRA: EC - Early Childhood
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