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Quant Finance Topics

  • Below is an overview of quant finance topics limited by my knowledge and biased by my research

General Tips

  • Pick practical topic. Beneficial to your job or future career?
  • Pay attention to practitioner journals:
    • Risk Magazine: Link
    • Journal of Computational Finance: Link
    • Wilmott Magazine: Link
    • Journal of Derivatives: Link
    • Journal of Portfolio Management: Link
    • Financial Analysts Journal: Link
  • Use online resources (Q&A, forum, code, etc):
    • Quantitative Finance Stack Exchange: Link
    • Wilmott Forum: Link. Technical Forum, Trading Forum, Numerical Methods Forum.
    • Quantopian (The Place For Learning Quant Finance): Link
    • Wikipedia / Baidu / Google
    • Github.com

Sell Side Research

  • Relatively more established as a academic field: easier to find literature, easier to add contribution
  • For sell vs buy side, read

Goals of Research

  • How to model financial time series / stochastic process?
    • New process to better fit real data?
    • Mathematically tractable model?
  • Fast and accurate numerical method
    • Efficient pricing of various derivative products
    • Fast simulation for Monte-Carlo method (Variance reduction?)
    • Calibration of model parameters to market prices
  • How to price new derivative product?
    • Method (analytic or MC) available?
  • New model to correctly capture the price from market or real time series?

Stochastic Processes

  • Geometric Browniam Motion: Black-Scholes model
  • Arithmetic BM: Normal (Bachelier) Model
  • Ornstein-Uhlenbeck (OU) Process: Wiki
  • Constant-Elasticity-Of-Variance (CEV) Model: Wiki
  • Stochastic Volatility Models: see Wiki for SDE.
    • Heston Model: Heston, S.L., 1993. A closed-form solution for options with stochastic volatility with applications to bond and currency options. Review of Financial Studies 6, 327–343. https://doi.org/10.1093/rfs/6.2.327
    • SABR Model: Hagan, P.S., Kumar, D., Lesniewski, A.S., Woodward, D.E., 2002. Managing smile risk. Wilmott Magazine 2002, 84–108.
    • 3/2 Model: Creator unclear.
    • 4/2 Model: Grasselli, M., 2017. The 4/2 Stochastic Volatility Model: A Unified Approach for the Heston and the 3/2 Model. Mathematical Finance 27, 1013–1034. https://doi.org/10.1111/mafi.12124
    • OU Stochastic Process:
  • Jump diffusion:
  • Rough Volatility (Fractional Brownina Motion, Wiki)

Derivative Products (Payout)

  • Spread/Basket/Asian Option
    • Krekel, M., de Kock, J., Korn, R., Man, T.-K., 2004. An analysis of pricing methods for basket options. Wilmott Magazine 2004, 82–89.
    • Choi, J., 2018. Sum of all Black-Scholes-Merton models: An efficient pricing method for spread, basket, and Asian options. Journal of Futures Markets 38, 627–644. https://doi.org/10.1002/fut.21909
    • Fu, L., 2019. Pricing Basket Options with Equivalent Bachelier Model (MA thesis). Peking University HSBC Business School, Shenzhen, China.
  • Timer Option
  • Barrier Option (Knock-in, Knock-out), Rainbow Option, Lookback Option, Compound Option, Etc
  • Cliquet Option
  • Parisian Option
  • American/Bermudan Option
  • VIX Index (Future, Options on Futures, Etc)
  • Variance Swap

Monte-Carlo Simulation

Mix and Match for new contribution (The combinations are unlimited !)

  • Model + Product
  • Model + Method
  • Model + Trading Strategy
  • XXX + China Market Data

Caution

  • Stochastic Process
    • What is the characteritics of stochastic processes?
    • Why are they popular? What are the strength/weakness?
  • Derivatives
    • What is the economic background of the derivative products?
    • Why certain products are popular?

Buy Side Research

  • Less established as an academic research.

Profolio Selection/Optimization

  • Minimun variance portfolio
  • Smart Beta (factor investing)
  • Risk parity portfolio (Wiki; Equal Risk Contribution): very popular in asset management industsry.

Trading Strategy

  • Alpha signal:
  • Can machine learning predict outperforming strategy given economic situation?
  • Consider uncommon asset clas (e.g., not equity): commodity, interest rates, fx, etc.

Caution

  • Just showing good performance of strategy is NOT enough.
  • Either need add academic connection or show effort.

FinTech Topics

Bitcoin Literature Review: Link

Crypto + Quant Finance

  • Bitcoin Option Pricing: which process fits bitcoin option markets better?
  • VIX index in Cyprocurrency: Alexander, C., Imeraj, A., 2019. The Crypto Investor Fear Gauge and the Bitcoin Variance Risk Premium (SSRN Scholarly Paper No. ID 3383734). Social Science Research Network, Rochester, NY.

Financial Machine Learning:

  • Current focus is in asset pricing (return prediction)
  • You may often need massive data + computation power
  • Often there are room for simple but good idea. Replace linear regression with other ML methods?
  • Software tool is readily avilable (sklearn, tensorflow, etc)
  • Extra new information with Natural Language Processing (NLP).

Books and Jorunals

  • López de Prado, M.M., 2018. Advances in financial machine learning. Wiley, New Jersey.: Link | Github
  • Hull, J.C., 2019. Machine Learning in Business: An Introduction to the World of Data Science.
  • Digital Finance: Link
  • Journal of Financial Data Science: Link

Papers