The Quantitative Fundamentalist
This site is dedicated to alternative finance and strategies that are meant to outperform the S&P 500, provide uncorrelated returns, and review esoteric areas of finance.
Alternative Finance
This site is dedicated to alternative finance and strategies that are meant to outperform the S&P 500, provide uncorrelated returns, and review esoteric areas of finance.
Normally, I detest most blogs. Honestly, if I was someone else, I would probably detest this one. Blogs, which can be great, but they can also be self-indulgent and predictable. I have friends that blog and when I receive an email that they have a new posting, it often goes straight to a Junk folder, where I either read it later or promptly delete it and am infuriated by the idea that someone has written something that I (or anyone else) would find remotely interesting or would take the time to read. I don't expect any different treatment of mine so harsh criticism or general apathy will be allowed (if not expected). I do regularly read some blogs and will try to keep this informative and well-written.
Wednesday, May 18, 2011
Kelly and Logarithmic Utility
where P = Pr(Win)
W= E[Win]/E[Loss]
Assumptions: 1) E[Win] and E[Loss] are known (unrealistic)
2)Pr(win) is known (also unrealistic)
Still, according to the law of large numbers, if you have lots and lots of trades or investments to sample from, you can use statistics to come up with these values. Further, if you can enhance anything Bayesian forecasting (or updating), you can further enhance your knowledge for E[Win],E[Loss], and Pr(Win).
Here is a Matlab function with three input parameters to calculate an equity curve:
function [equity] = Kelly(p,PF,initialEquity)
%% Kelly criteria for logartihmic utiliity
optimalF=(p-((1-p)/PF));
equity=zeros(1,1000);
equity(1)=initialEquity;
for i=2:1000
equity(i) = equity(i-1)+ (randn*optimalF);
end
And here is a script that generates 16 equity curves for different E[Win]/E[Loss] ratios and Probabilities for winning.
initialEquity=100000;
p=.35:.10:.65;
PF=.5:.5:2.0;
equityCurves=zeros(length(p)*length(PF),1000);
i=0;
for b=1:4
for a=1:4
i=i+1;
equityCurves(i,:)=Kelly(p(a),PF(b),initialEquity)
subplot(4,4,i);plot(equityCurves(i,:))
end
end
Lastly, a graph of the plots:
Tuesday, March 22, 2011
On Process and Implementation:
- Reliance on process, and not results.
- Continuous and Never Ending Improvement (CANI)
- Communication with your clients and a customer-service orientation
- Willingness to fly in the face of conventional wisdom and research all possible ways of providing returns
- Willingness to forego short-term gain in the interest of long-term success and doing what is “right”
- An absolute passion and love for what you are doing
Monday, February 7, 2011
Hedge Funds substantially outperform market index
Please see article:
Wednesday, January 19, 2011
It's Pete's world, we just live in it...
Gatheral's Stochastic Volatility Inspired (SVI) approach to model vol skews
Gatheral then uses an objective function minimization process compared to the implied vol given by Black-Scholes:
The resulting skew/surface (3D in time) looks like this:
This is extremely useful in pricing exotics, variance swaps, and trading illiquid vanilla options.
Many thanks to Chris Prouty, Cargill Risk Mngmt Trader (mentor and friend) and fellow classmates (A. Abraham, F. Yang, F. Wan, S. Chiu, S. Bhimireddy, and Y. Li).
for more info see:
https://sites.google.com/site/fmmodeling11/?pli=1