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17 Oct, 5 tweets, 3 min read

(Thread) Forecasting

Once upon a time (many many many years ago!) one of my friends was asked to implement a forecasting project as the last stage of getting an offer from a prop trading firm in Europe. Below is the problem statement:
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Input data consists of (several hours of) trade and order book data for a listed product.
Order book data consists of time, bid/offer price and size resp. whereas the trade data
consists of time, price and volume.
Objective: Build a quantitative model to trade this instrument.
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My friend was a uni. chicago booth grad but had a lazy arse so I helped him implement it with the help of a common HFT friend. We both knew shit and the project was all implemented through the HFT guy’s guidance. I’m just presenting the report below. Check out.
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Some useful reading material related to the project:
statweb.stanford.edu/~tibs/lasso/la…
online.stat.psu.edu/stat857/node/1…
www4.stat.ncsu.edu/~post/josh/LAS…
glmnet.stanford.edu/articles/glmne…

I learnt something at that time while we were implementing but don’t remember much now. But thought it's a good time to revisit.
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@AnandableAnand

@AnandableAnand @tarunnayak21 and anyone else into TA or algo trading would like to know your views on the indicators pls specially the volume ones. If this is even relevant for us retailers? I do believe a lot of it surely does like the VWAP, smart price, volume indicators.

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@muskk

28 Aug

(Thread) A basic math primer for people with non-math background (this will also help in understanding my post tomorrow on India VIX).

I’ll be simplifying a lot of math details here.

I’ll mostly talk on "expected value" and a bit on integration.
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Expected value is one of the most important terms in financial markets. When we want to find fair value or “price” of any financial derivative we mathematically try to find its “expected value”. We will define what it is later on. But first let’s talk about random variables.
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Random variables: When we talk of random variables we talk of what values/outcomes a variable can take and what is the probability of each of these outcomes. So, two important terms here: outcomes & their probabilities.

Nifty, BNF (and their vols etc) are all random variables
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Read 11 tweets

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@muskk

21 Jul

(Let’s do some math!) Thread on how to retrieve probability density function (PDF) of any underlying from its option prices. We will use this result later on in another thread I’ll post in the future to derive an equation for VIX.

Let's go...

Let’s first look at equation to price a call option at any time t, maturing at time T and with Strike K:

(refer equation1 pic below)

here F is forward, E[] is expectation & B(t,T) is discount factor. I’m excluding a few math details like measures & numeraires to keep it simple.

Let φ be the probability density function (PDF) of the underlying we are trying to recover. Let’s try to solve the expectation above (ignoring discount factor and other parameters C depends on to make equations look simpler)

(refer equation 2 pic below)

Read 7 tweets

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