6. Finamatrix: Risk Cybernetics
Leading & Dedicated Research in Risk Control for Sustainable Returns
In support of open education, each candidate is to submit an original research
paper on the topic “Risk Control for Sustainable Returns” or a related topic
that is approved by the supervisor. Papers will be published and made
available on www.tsinghua-galaxy.com
7. Question
What is your biggest problem when making investment decisions?
a. Not enough information
b. Not receiving information fast enough
c. Too much irrelevant information
d. None of the above
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8. Quotes
“One trader’s beliefs are as good as any other trader’s belief ” (that is, they are
useless)
– Fischer Black
“If you have invested intelligently, today’s news will have little impact on your
retirement account or portfolio performance.”
– Richard Bernstein
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9. Why FE / QF? 为何量化?
- Problem of unknown relationships
- Market inefficiency
- Statistical challenges
- Non-linearity
- Pareidolia: insignificance perceived as significant
- Ludic Fallacy: misuse of games to model real-life
- Black swans
- Reflexivity
- Strategic risks
- Vol-trading
- FE is tool to help solve quant problems in logical way
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10. Questions
Under what scenarios are risks not equal to returns?
When are risks equal to returns?
In vol-trading, how do you measure and price risks?
How do you create high-probability vol-trading systems?
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12. Vol, Risk, Uncertainty
波动性,风险,非确定性
Risk: quantifiable uncertainty
Vol: Risk measure
- Vol comes in many forms
- Vol measure must suit purpose
- Vol-trading is key to sustained algo-returns
- Risk control implemented with stop-loss
- Clients sensitive to max draw-downs
- X% loss in a month and you are out
- Absolute loss of $Y and you are out
- Target returns achieved with signal-optimization
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13. Efficiency
Question:
If financial markets are “efficient”:
a) News embedded in prices, quickly becomes useless
b) No differential advantage/disadvantage to trading with/without news
c) Prices are always fair; they reflect all that is known at the instant of a trade
d) All of the above
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14. Efficiency
Question:
What features set the stage for an efficient market?
a) There are many active participants
b) Participants have similar objectives
c) Participants have equal access to same data
d) All of the above
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15. China Hedge Funds (15 years?!)
对冲基金 2 Categories:
1) Government-backed companies including brokers managing
pooled property, trust and investment companies' trust and
investment projects. Investment companies managing their own capital.
2) Private hedge funds in form of “Investment Consulting Company" or
"Investment Management Company", they provide management for pooled
property.
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16. China Hedge Funds
- China gets first official hedge fund
- Feb 2011:Guotai Junan Securities readies a $45 million hedge fund, the
first such product approved by securities regulators
- Plans to raise 300 million yuan initially and would use index futures to
mitigate systematic market risks
- Although many privately-run Chinese fund managers with no licenses
call themselves hedge funds, with some also using derivatives to hedge risks,
none of them have been approved by regulators.
- China launched index futures (Apr 2010) and allowed short-selling for
the first time
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17. China Hedge Funds
- “There's huge demand for hedge funds in China, with the market awash with
cash seeking modest, but stable returns," Zhang Biao said, adding that the
product targeted wealthy individuals with a subscription threshold of 2 million
yuan.
- Zhang, aspires to become China's James Simons, the well known fund
manager at Renaissance Technologies, said the fund would adopt a so-called
market-neutral strategy, aiming to maintain a close balance between long and
short positions.
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18. China Hedge Funds
- Targeting an annual return (年化回报) of 10-15 percent for its first hedge
fund, Guotai Junan planned to launch identical funds later to raise up to 5
billion yuan, he said.
- Zhang Biao brushed aside concern that hedge funds could play a
destabilising role in China's stock market, saying: "The door is just
open. Hedge funds in China are rabbits and sheep now, not wolves and tigers.
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19. Trading Case
Put option (认沽期权) not call option (看涨期权) purchases
predict institution-sized stock purchases
Options, less liquid than stock, are typically bought first by
an institution before buying a stock, to minimize risk
During a recent day, eight significant volume and price spikes
were noticed in nearby out-of-the-money puts, the options
favored for insurance
Tracking the stock at one minute intervals after each of these
option spikes showed that if stock were purchased within 30
seconds and sold ten minutes later, these trades would be
profitable 80% of the time, with profit averaging 0.25%.
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55. Recent Topics
1. Reinforcement Learning for Automated High Frequency Trading
2. Multidimensional time-frame for index future
3. Can VAR Models Capture Regime Shifts in Asset Returns?
4. Constructing a truly diversified quant portfolio
5. How strategies diversification can protect against the black swan.
6. Investing in Hedge Funds under Solvency II
7. A journey in Risk Weighted Portfolio and CTA
8. How to Find a Black Swan in a Dark Night
9. Exploiting the versatility of ETFs for Asset Allocation
10. High Frequency Trading and its market quality
11. Using Corporate Credit Analysis To Predict Equity Returns
12. Algorithmic Trading: Dynamics and Market Impact
13. The application of Independent Component Analysis
14. Margin lending for counterparty credit risk
15. Combining Quant and Traditional strategies
16. Market Spreads versus Fair Value Spreads in the Fixed Income Arena
17. Euro sovereign bond yields and the ECB Securities Market Program
18. Process Performance testing versus Traditional back testing
19. Strengths and weaknesses of statistical indicators
20. Geometric Mean Maximization
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56. 参考文献
Lars Jaeger (2002) Managing Risk in Alternative Investments. FT Prentice Hall.
Stephen Walker (2010) Wave Theory for Alternative Investments. McGraw-Hill.
CAIA Level I (2010) An Introduction to Core Topics in Alternative Investments.Wiley.
CAIA Level II (2010) Advanced Core Topics in Alternative Investments.Wiley.
Nick Leeson (1996) Rogue Trader. Little, Brown & Co.
Larry E. Swedroe, Jared Kizer (2010) The Only Guide to Alternative Investments You'll Ever Need. Wiley.
Raghurami Reddy Etukuru (2011) Alternative Investment Strategies And Risk Management. iUniverse.
Greg N. Gregoriou (2008) Encyclopedia of Alternative Investments. CRC Press.
Vishaal B. Bhuyyan (2011) The Esoteric Investor: Alternative Investments for Global Macro Investors. FT Press.
Rudiger Kiesel et al. (2010) Alternative Investments and Strategies. World Scientific Publishing.
Mark J. Anson et al. (2010) The Handbook of Traditional and Alternative Investment Vehicles. Wiley.
Greg N. Gregoriou (2009) The VaR Modeling Handbook. McGraw-Hill.
Alan H. Dorsey (2007) Active Alpha: A Portfolio Approach to Selecting & Managing Alternative Investments. Wiley.
Sona Blessing (2011) Alternative Alternatives: Risk, Returns and Investment Strategy. Wiley.
Lanz Chan (2010) Risk Cybernetics: Training Manual Version 1.0. Finamatrix.
Irene Aldridge (2010) High-Frequency Trading: A Practical Guide to Algorithmic Strategies. Wiley.
Lanz Chan (2011) Automated Trading with Genetic-Algorithm Neural-Network Risk Cybernetics. Finamatrix.
Christopher L. Culp (2002) Art of Risk Management. Wiley.
Zsolt Endre Berenyi (2003) Risk and Performance Evaluation with Skewness and Kurtosis. Lang, Peter Publishing.
Academic papers from: ssrn.com
Note: course notes available for download are sourced from the above references and based on core topics from the CAIA
program.
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