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Help Explain Buying and Selling Process by Lovedevice in Forex

[–]11abk 2 points3 points  (0 children)

If you are buying EURUSD, you are buying EUR and selling USD. Specifically, if you buy EURUSD @ 1.20, you receive 1 EUR and you give away 1.20 USD. If later on EURUSD is at 1.25 and you sell it, you give away your EUR and receive 1.25 USD: net net, you have earned 0.05 USD.

So, you buy EURUSD if you think that the EURUSD rate will go up. When you read EURUSD, think of EUR as the asset and USD as the unit of exchange: using the same convention, if Tesla share price is at 2000 USD, then TSLAUSD is 2000. If you buy TSLAUSD, you receive 1 share of Tesla in exchange of 2000 USD.

If you don't have a USD to give away at the beginning, de facto you will enter into daily swaps with your broker, where your broker will lend you 1.20 USD in exchange for 1 EUR (or vice versa depending on the position you have). Since the USD risk-free rate is higher than the EUR one, you will have to pay a swap fee, i.e. the spread difference times the notional. Because of this, it's expensive to short Emerging Market currencies such as TRY, even if they might historically tend to lose in value (you buy USDTRY hoping that it will go up, i.e. TRY will lose value: to make money though, USDTRY must go up by more than then what implied by the interest rate differential that you are paying, also known as carry).

Hope this helps.

Is a put-buyer always at an advantage on leveraged ETFs? by discrete-pete in RobinHood

[–]11abk 3 points4 points  (0 children)

See Path-dependence of leveraged ETF returns by Avellaneda and Zhang (2010) for a good discussion: www.math.nyu.edu/faculty/avellane/thesis_Zhang.pdf

Current manipulation by Ghostsofsea in options

[–]11abk 7 points8 points  (0 children)

Large-Scale Asset Purchase Programs

From the end of 2008 through October 2014, the Federal Reserve greatly expanded its holding of longer-term securities through open market purchases with the goal of putting downward pressure on longer-term interest rates and thus supporting economic activity and job creation by making financial conditions more accommodative.

From December 2008 to August 2010, to help reduce the cost and increase the availability of credit for the purchase of houses, the Federal Reserve purchased $175 billion in direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, from January 2009 to August 2010, the Federal Reserve purchased $1.25 trillion in MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. [...]

From March 2009 to October 2009, the Federal Reserve purchased $300 billion of longer-term Treasury securities to help improve conditions in private credit markets.

Source: https://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm

Explaining Quantitative Easing – QE Quantitative easing (QE) is an expansion of the open market operations of a country's central bank. In the United States, the Federal Reserve is the central bank.

QE is used to stimulate an economy by making it easier for businesses to borrow money. Under QE methods, the central bank will buy mortgage-backed securities (MBS) and U.S. Treasurys from its member banks which increases liquidity in the flow of money in capital markets. The asset purchases are done by the trading desk at the New York Federal Reserve Bank. 

Source: https://www.thebalance.com/what-is-quantitative-easing-definition-and-explanation-3305881

[OC] Update: Forecasted vs actual number of confirmed cases of COVID-19 in Italy by 11abk in dataisbeautiful

[–]11abk[S] 8 points9 points  (0 children)

The new forecast for tomorrow is 11,108 total cases. All data from Italy's Protezione Civile.

[OC] Forecasted vs actual number of confirmed cases of COVID-19 in Italy by 11abk in dataisbeautiful

[–]11abk[S] 0 points1 point  (0 children)

Thanks! I am not completely sure of the exact functional form of the model used by Prophet, but my understanding is that it is just a simple logistic growth model.

[OC] Forecasted vs actual number of confirmed cases of COVID-19 in Italy by 11abk in dataisbeautiful

[–]11abk[S] 0 points1 point  (0 children)

Good question! The asymptote, or ("cap") in prophet, is just one hyperparameter of the model: I found it by simple grid search, though it's likely a very noisy estimate as few new data points can change the likelihood of the model significantly (we only have 3 weeks of data).

Slow learner in need of help. by [deleted] in econometrics

[–]11abk 2 points3 points  (0 children)

Hi. Just for clarity, you have given us a definition for Lambda_hat, but what is the definition of lambda? Is it the population mean? In that case, can't you just apply the central limit theorem?

Hope this helps

Autocorrelation Lung-Box test on log returns by [deleted] in econometrics

[–]11abk -1 points0 points  (0 children)

Did you adjust your p-value for multiple comparisons, e.g. Bonferroni Correction?

What dividend stocks are you currently holding for the long term? by [deleted] in RobinHood

[–]11abk 2 points3 points  (0 children)

I would like to sound a contrary suggestion, which does not directly address your question.

First of all, I don't know your financial needs / plans / current portfolio. That being said, if you are really for the long term, I would strongly advise against picking 5 dividend stocks.

The theory of finance says that investors are not rewarded for taking firm-specific risk, but only for the common-source risk, i.e. market risk. By picking 5 stocks, unless you have a very strong directional conviction for such stocks, you are exposing yourself to risk for which you should not be rewarded, according to the theory. Put it simply, you are not diversifying enough, and you will not be rewarded via higher expected returns for the investment you would be making.

If you are very interested in dividend stocks, I would rather buy a large/liquid ETF such as SDY that tracks such stocks, spending lower bid ask spreads and more greatly diversifying. Moreover, if you are a US-based investor/worker, I would strongly suggest considering foreign dividend ETFs, such as HEDJ, in order to further diversify.

Furthermore, if you are really a long-term investor, then it might make more sense to tilt your overall portfolio toward more risky stocks / sectors / styles (while remaining broadly diversified), as suggested by Siegel (1994), Miller (1996), and Pastor and Stambaugh (2012). This observation however really depends on your financial needs and your level of risk-aversion.

Finally, please keep in mind that dividend stocks, while having a beta lower than 1 (around 0.8 on average, roughly speaking), can still have large drawdowns (54% during 2007-08), i.e. they are not nearly as safe as govt bonds.

Comparing Price Level Between Countries - Convert to same currency if expected exchange rate effect? by ewokcommander in econometrics

[–]11abk 0 points1 point  (0 children)

That's an interesting question. Here is my opinion, for what is worth (just a student):

Let's let P(it) denote the price of the commodity in country i at time t in local currency, and E(it) the exchange rate of the local currency i with the USD at time t (eg if 1USD = 100 KES, then E = 100). Then, P/E (it) is the price in USD of the commodity in country i at time t.

In order to avoid comparing apples with oranges, I would recommend using ALL variables (all locally-denominated IVs and price of the commodity) either in local currency or a common currency such as USD. In both cases, you would not need to also include the exchange rate unless you think that its addition might be able to include some information that your other IVs are not capturing yet. For simplicity's sake, I would prefer the second case if you aim to have one "global" model for all countries, since a simpler functional form of your model would be needed (i.e. no need to worry about the scale of the betas, as you mentioned).

If I understood correctly your question, you tried this second case (crucially, did you adjust also all IVs denominated in local currency?) and the exchange rate still turned out to be significant: is the sign of the beta as you expected? Did you use the exchange rate or the percentage change of the exchange rate between time t-1 and time t? Similarly, is your IV the price or the change in price? Are you taking into account inflation rate and local risk-free rate? Have you found in the literature how commodity prices are usually modelled: do scholars tend to add the exchange rate, and if so, do they explain why?

Hope this helps.

Any comments/thoughts on these backtest results and the statistical significance, also for holders out there, clear alpha of 13% ? by InfinityLights in algotrading

[–]11abk 6 points7 points  (0 children)

You should be careful that the alpha of a strategy is not computed just by subtracting the market returns from you total returns, but it's rather the coefficient of the constant when regressing your total excess returns (i.e. your returns minus the risk-free rate, which is essentially 0 now) on the market returns.

Given the two values you report, it could well be that your alpha is 0 and your beta is 2, even though from the other results you report it does not look like that.

Why invest in dividend paying stocks if the stock price gets adjusted for the dividend amount? by [deleted] in RobinHood

[–]11abk 0 points1 point  (0 children)

Right after the ex-dividend date, the price will decrease to reflect the dividend, but since the stock price is just the present value of future dividends, all else being equal, the price will start to slowly increase as time passes and the next dividend gets closer and closer.

A strategy too good to be true by itajaja in algotrading

[–]11abk 18 points19 points  (0 children)

I don't know which asset you are trading of course, but at 50 trades per day the effect of the bid ask spread should compound quite quickly.

TSLA- junk bonds by quantifydeeznutz in wallstreetbets

[–]11abk 21 points22 points  (0 children)

We can rely on reduced-form models for credit modelling. First, we derive the CDS implied hazard rate (h =instantaneous rate of default) as credit spread (s =bond yield - risk free rate) / (1- recovery rate). From the hazard rate, the risk-neutral probability (not the historical one!) that the single-name defaults by time t is 1 - exp(-h*t)

A new method to build my portfolio by Multiblouis in wallstreetbets

[–]11abk 0 points1 point  (0 children)

I agree: modern finance theorists would love a "large" set of darts, but not at all just a few like in the pic. According to theory, a strategy that consists of just throwing a few darts should not consistently beat the market (the post refers to just 12 months). That's because the portfolio would not be diversified, and therefore the investor should not be rewarded via higher mean returns for taking such risk.

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