Market Notes ( 275 + 25 ) Pages. Treatments to Risk-Neutral Measures and Girsanov Theorems.
This week, in our lecture notes, we introduce theory to risk-neutral pricing and Girsanov Theorems, tying together useful concepts in derivative pricing. The theory in this and the past series of notes now allow us to both understand and synthesize arguments in continuous time - a useful tool for reading papers that formalize under continuous time arguments. This can be found in Chapter 11 Section 3.
The table of contents may be viewed here:
In the previous weeks, we have focused mainly on developing theory and writing interesting source of alpha signals, as well as stress testing well known effects. In particular, we have written about
earnings drift,
currency premiums,
currency flows,
event driven macro policy currency trading,
accrual factors and
google trend data.
This came after a series of posts dedicated to quantitative engineering, design and implementation of Python systems.
In the following weeks to come, our weekly writings will tilt towards the theory and practice on asset management and active portfolio management. In contrast to previous introductions on return shattering and so on, this time our focus is on developing more rigorous mathematical formulations, as well as code implementations for practical code libraries on portfolio optimization.
We will continue to swing between different core topical areas in both the practice and theory of systematic trading and general market theory. Sometimes, we will focus on the engineering the code and trading systems behind theoretical ideas put forward (such as the use of APIs, backtesting tools, order executors and data service layers), and other times we will look at interesting signals and develop a more complete model of the market dynamics with parallel discussions of mathematical basis.
To also include a section driven by the empirical analysis of market data, we also included a section called `Market Historians’ in the Appendix, which are interesting time series data that we will now track in our market notes. For now, this is for my own reference only, and I have yet to develop it into something more meaningful, but you can also refer to it if needed. I have plans to add on to and use the information in the future, but for now, we won’t make much comments on it.
In the coming theoretical notes, we will develop Feynmac-Kac theorems as a continuation of Stochastic Calculus theory. This will be accompanied by the study of multi-asset/multi-strategy portfolios and asset allocation problems.
Full Market Notes: