THE TRADING SHOW NYC -2014 review by Sholom

THE TRADING SHOW NYC -2014

 

This year the trading show was one day instead of two due to Sudden drop-offs in attendance on the second day. Terrapinn used some statistical analysis across all their events and detected this attendance pattern.

 

First up was Bruno Dupire – Bloomberg Quantitative Research.

 

Quantitative Volatility:

 

– Fair Value Skew (Curve) : , You always need to determine a fair value price before you can trade.

 

– Risk Premium = Market Value- Fair Value

 

– Delta Hedging Cost = Frequency of Hedging * Risk Premium

 

– Periodicity -> Path dependent volatility

 

– Mean reversion:

Over Time -> wait for the price to return to a specific price level.

Over Space -> multi-asset arbitrage with rebalancing.

Changing the weights of the asset allocation.

 

– Theoretical skew constructed from price history.

 

Long skewness not related to short skewness.

 

Mistakes:

 

1) Creating a frequency histogram of returns and then trying extrapolate these returns into future.

 

2) Monte Carlo on daily returns (assumes return independence)

gives you something very flat due to central limit theorem.

 

Backtest your delta hedging:

 

1) Discounted average of the intrinsic value from re-centered 3 month ATM option histogram.

 

2) Compute IV which makes delta hedging a Martingale.

 

Fair price is the average square of the price difference weighted by gammas.

 

Risk Premium = IV – HV

 

IV = Market Price

HV = Fair Price

 

Alternative risk premium:

 

HV10 – HV50

 

IV10 – IV50 (IV is much more volatile than HV)

 

For IV50 and HV50, remove all outliers:

 

Types of Outliers:

 

Explicit Exogenous Outliers –> White Swans (Macro Events)

Implicit Exogenous Outliers –> Gray Swans (Macro Events)

Hidden Exogenous Outliers -> Black Swans (Unknown)

Explicit Endogenous Outliers –> (Market Hedging /Operations)

Implicit Endogenous Outliers –> Dragon Kings (Market GARCH/Fat Tail Dynamics)

 

Quant Risk Roundtable:

 

-The Fed has become a bank that is highly political.

It is scared, highly reactive, and will never raise rates until

It is forced to.

 

– What forces the Fed to Act?

1) Inflation/Unemployment balancing mandate

(Inflation Target = 2%, Unemployment Target = 5%)

2) The Bond Market

3) Public pressure

 

—————

Bond ETF future crisis?

What happens when the bond market crashes?

Bond ETFs that were very liquid will have a very illiquid underlying. Will Bond ETFs get a government bail out?

That may NOT be too big to fail.

 

Thanks to him for doing this review

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