## summary and roadmap

### February 18, 2010

Approaches:

- microstructure/order book/agent based modeling/market maker/double auction/gaming/liquidity-> largestly heuristic but more pragmatic
- dynamic system approach/econophysics, distribution, complexity, much on theoretical level
- hardware/latency/routing/optimal execution, institution dominates with fancy word such as ‘dark pool’
- HMM-Kalman filter/BDNetwork ML(EM etc.)/Classifier (VM, NN, TREE, BOOSTING etc) ->advanced technical analysis, advanced classifier
- RLearning, GA, evolutionary market hypothesis -> capture market dynamics(?), prediction power(?)
- pair trading, Stats Arb, –> technically simple yet basic, BREAD AND BUTTER OF algo trading.
- last, most basic and fundamental is money management and risk management. control of order flow, system monitoring.

information theory address both problem, estimation(model)/inference(observation) and optimal betting/money management(kelly/drawdown/portfolio) together on the fundamental level. MPT address the second problem for multivariate case.

let start with most basic and most fundamental proble: stat arb

- modelling dynamics of stat arb [kalman filter application, with time dependency, long winding?]-> paper
- stat arb in US equity market -> paper
- pair trading, with EM algo, model mean reversion with state space model, [clear and succinct, kalman for estimation, EM, smooth KF for model validation, interesting idea is using Ornstein-Uhlenbeck stop time as exit strategy]05-> paper
- flexible least square for data mining and stat arb apply on ETF, imperial math/bluecrest, Tesfatsion’s FLS page -> paper [ this paper discussed the
**implementation**of an online FLS algo, and online SVD for priciple component] - data mining for algorithmic asset management on Futures, Montana 09 -> paper
- FLS and stat arb in layman’s term ->[the is a
**waste of time**, so much so for B-school professors] paper - Review of Statistical Arbitrage, Cointegration, and Multivariate Ornstein-Uhlenbeck [clearly written, intuitive, my favorite so far.], Attilio Meucci BB alpha head-> link
- Engle Granger, erro correction representation and cointegral -> paper
- Engle Granger 87 -> paper did this one won them nobel? repost again for emphasis.
- UCDavis Econ time series course with all the reference and list of topics -> website
- pair trading, performance of relative arbitrage rule [utility sector, average crossing, bid-ask bounce, trading cost, question left open is: a) how to choose the threshold? b) within trading period till when before next calibration you should not trade? ]-> paper, 06 IFC working paper
- here is an paper describe all SA strategy [wast of time] -> paper
- an intelligent SA system [
**a good outline of strategy**, (moving window to estimate B, and NN-Garch for interval estimation and corresponding trading strategy]-> paper - high frequency pairs trading with u.s. treasury securities[touched implementation issue e.g. repo financing cost in rates market ]-> paper
- statistical analysis of cointegral vector(strucuture change) -> paper
- THIS google search would yield interesting result, example here, here ( Alexandre 08), here(alexandra investment related to AP Alexandra?)here, here cointegration alpha: index tracking(carol alex 02), here (carol alex 03), here( carol alex JPM 05), here( this one came from SMU), optimal hedge cointegration (carol alex)|| here(fractional cointegration ”09), copper market efficiency, metal future efficiency
- an VERY good tutorial: NYU Courant Stat Arb course, let’s call it Dyna arb? the author Farshid Maghami Asl is a VP in GS FICC. other courant people(robert almgre, algo 08, marco avellaneda present some course presentation here), there is a good portion dedicated to vol trading and stoch vol estimation using KF, but not enough details is given out. Chpt 14 start to touch some interesting general topics as financial system, robust control, bayesian optimal control and control of balance sheet, again just touched, not enough details.
- pair trading, quantitative method and analysis -> book
- pair trading, capture profit and hedge risk with SA strategy -> book
- Tsay’s course website for Time series analysis -> 1 2

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