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I think it's a good question. I interviewed with two different stat arb groups in fall 2007. At one of the interviews I outright asked, "Isn't statistical arbitrage a contradiction in terms?" Needless to say, they were a little touchy about that, since August that year had brought the first...

This may be the wisest post I've ever seen on Quantnet.

It's certainly true that if you're flying in the Himalayas, it's criminal to watch your altimeter but not look out the window. This fact does not make it a good idea to throw out your altimeter altogether, though.

Unfortunately, I believe this response is a perfect illustration of the misinterpetation this piece invites. Sylvain has as usual caparisoned his rhetorical cavalry richly, but in this case seems to have marshalled them with rather less care. To conclude on the basis of an essay bemoaning the...

Very interesting program announced today. Here is a Bloomberg article that gives the outlines. Attached is the Fed's own doc describing the deal. Fed will lend for one year at a rate determined by auction to the holders of Aaa-rated tranches of new issuance in auto loans, credit card...

Drinen is a contributor the the fantasy football site I use. Some of their stuff is quite good. The stereotype is that baseball is the game for statisticians, while football is the game for meatheads, but that's changed quite a bit in the past decade--both within the game with the advent of...

My dog thinks 6th ed is delicious. Seriously, though, two of my coworkers have battered copies of 5th ed, while I have 6th, and I have never once found myself looking to the 5th ed for something 6th didn't contain.

I always hoped I could find a place where all those hours I spent tuning my Prison deck would pay dividends.

This is not a charade. It is, at a bare minimum--even to the most cynical--a symbol of who we are now as US citizens, and a symbolic break with the at times shameful reality of who we have been. There have been few days, particularly in the last decade, when I could honestly say I'm proud to...

This is fun! This week's group with their hands out: automakers, monolines, states and municipalities and (hey, why not?) even taxpayers I work across the street from the Fed. I expect to step outside one day and see nice wicker baskets full of cash lined up along the street. Some beautiful...

Enjoy. Wonder if they're hiring now?

Happy birthday, Maggie, and many happy returns.

Thanks, Max. Good to know what to be short this month. By the way, I'm tired of calling outfits like this "hedge" funds. Unless the rest of your portfolio is double-short the S&P 500, this isn't much of a hedge. Or perhaps under a hedge is where Jeffrey Gendell will be living next month...

Just made an edit to my original post; you might find it helpful.

Seems to me the formula used should be, in terms of spot: \[K = S_0 exp{(r-q+\frac{1}{2}\sigma^{2})T-\sigma \sqrt{T}N^{-1}[\Delta_{spot} e^{qT}]}\] Looks to me like your problem is that you're using the domestic rate inside your normsinv call, rather than the foreign rate. Note that delta in...

Haven't done any of this myself, but here's a paper that might come in handy. It describes several methods of extreme-value modeling, including among them generalized pareto, with examples and some notion of how you find parameters. For generalized pareto, it seems that setting your threshold...

Even LIBOR isn't a great measure of the real funding rates at the short end, for reasons discussed in another thread. Over here we use Reuters df's for this purpose. Pretty much everyone uses futures for the middle of the curve and par swap rates at the end. Reuters uses both LIBOR and quoted...

I know. I'm fully expecting Treasury to come out tomorrow and say that they're guaranteeing all debts by all listed US companies, at which point the Dow will go to 0 and Godzilla will emerge from the East River to eat Manhattan. Anybody watching sovereign CDS on the US? Sort of interesting.

Cool topic. I once did a back-of-the-napkin calculation that showed we could produce electricity equal to the world's annual energy need with a surface area of solar panels roughly equal to the size of New Hampshire. Sounds big, but there's a lot of BLM land out West that gets good wattage...

Whee! I can see my tax dollars working already!

It's silly to say that their money isn't on the line. European banks are knee-deep in US consumer and corporate credit, which means that a good deal of that money currently sitting in the wallets we're hanging onto was theirs in the first place. The Senate will almost certainly pass the deal...

You're right that something will pass, but the question of when is not a trivial one. They're pretty much done for the next 5 weeks. Everyone will be out campaigning. The results of the election will dictate what the House is able to do. If the election returns the House to the Republicans...

The fundamentals of the Space Shuttle Challenger were strong, too. Just not those pesky O-rings.

The ride isn't over yet. Everyone in the House is up for re-election / eviction this year, and there are only 5 weeks to go. They have to campaign sometime.... Meanwhile, it looks like the commercial banks are getting their turn. Wonder how many will be left when the election results are...

I'm skeptical that any deal will help for long. Can you picture these banks, which are deleveraging at lightspeed, taking this cash and going to market with it in search of returns? I think they have other things to do with it, including keeping a lot of it handy as shark repellent. To whom do...

Someone who works on a credit desk might want to chime in, but there are several different ways of defining a credit event, and thus different contracts, spreads, and so on: Cum (with) Restructuring Modified Restructuring Modified Modified Restructuring No Restructuring For further background...

We've actually had some passionate arguments at work over this recently. We take yield curves built at the short end from observable and liquid market instruments, which in normal times are in pretty good agreement with LIBOR. Now, not so much; the volatility of the composite 3M market rate...

I haven't spoken to Ann about her (no doubt cruelly abbreviated) comment in this article. However, I have a feeling that the "other mechanisms" referred to here may somehow bear a resemblance to the "other mechanisms" that led to this whole business in the first place. I especially love this...

Thanks--this is priceless. Nice to see Ann being quoted here, too, since Sylvain is the one who gets most of the press. Wasn't aware that they were paying even above-book for these things. I can see why the Senate is balking. That sounds like a terrible idea to me. Some random political-ish...

This has always seemed like the most sensible guiding principle for a bailout: pay them market, but lend them the difference between that and book. Give them a prepay option and a share in any equity that might result from the the surrendered securities performing better than implied by market...

Sure. Add in a nice pile of CDS protection and you have a trading strategy--one that it's clear a lot of folks have been using in the recent past. The really cynical thing to do is to use some of the excess cash generated by this piracy and buy the target's bonds once their yields are driven...

Looks like a bargain price, given that they were able to pick and choose the asset classes they bought. The jobs thing will put huge pressure on the bankruptcy judge to let it go through--wonder how the creditors feel about it?

All right, but it's difficult to disagree with a tautology. If the answer to how we trade well is not to trade badly, then the situation truly is dire. You speak of it in pejorative terms, but to my mind what "risk management" is missing, precisely, is the ability to manage failure. It's a...

That sounds good, but how do you make traders running books in the millions "responsible" for the risks they take? Seize their property when they take a loss? Edit to Add: Not that I think risk management as currently conceived is necessarily the solution either. You can only hear about...

Time to consider the possibility that 20x leverage on $600 billion in assets is a crime, not a business model.

http://news.yahoo.com/s/nm/20080915/bs_nm/lehman_dc_71 Reuters is reporting that Lehman is likely to declare bankruptcy by midnight. They are also reporting that Merrill is about the be acquired by BofA. Insane.

A sad day down here in lower Manhattan for a whole host of reasons. It seems Lehman's demise is a foregone conclusion. Is anyone here looking at Washington Mutual? I believe I saw yesterday that CDS on their debt was trading as high as 40% upfront.

Something that any of you who have margin accounts at your brokers might want to read: Herb Greenberg » Blog Archive » How to Keep your Investments Safe

37 minutes ago WASHINGTON (Reuters) - The FBI has opened investigations into 14 corporations as part of a crackdown on improper subprime lending, agency officials said on Tuesday. FBI officials told reporters the probes involved potential violations including accounting fraud and insider...

Mostly I'm rooting for a good game. If it's anything like the one they played in Week 17, this one shouldn't disappoint. However, as much as I'm happy for Eli and the Jints, I just can't root against the Pats on this one. Actually being able to witness the undefeated season is too exciting...

Funny that you forgot the Jets in this list. I know, it's easy to do this year. It appears to be a good year to be a Boston sports fan, however. Not only do the Red Sox have to be the favorite over a Colorado team that has had a week to cool off, but the Patriots are just sick. They're #1 in...

In concept, it can be done using the Feynman-Kac theorem with discounting. Using an underlying that obeys the SDE: (dS = \mu S dt + \sigma S dW) We seek the pricing formula: (V(S,t) = E^{S,t}[e^{-r(T-t)}g(S(T))]) As long as our payoff function g is well-behaved under this probability...

Well, so much for that. You have to wonder what the game would've looked like if Phillips had gone for it on 4th-and-short, down 14 in the 4th quarter with 10 minutes to go. I frankly don't see how he thought he was going to win after he kicked that FG. NE did have their defense solved, but even...

Pats-Cowboys should be very interesting: The Pats are -6 on the road, which seems a little generous to me. I mean, the Pats are good, but an undefeated home dog by almost a TD? The opening line on this one was Pats -4, so the money is definitely chasing NE. I'll take Dallas +6. As for the...

For now, I need to learn everything I can about asset management and alternative investments. I expect I'll still be doing so 2 years from now. Longer term, my ambition is to use that knowledge, and my knowledge of structured finance, to put health insurers in this country out of business and...

There are oppoprtunities to enter the industry at every level--undergraduate and beyond--but the kinds of positions you'll have access to will depend on what you know. The main thing I would find out about the undergraduate programs you're considering is whether you'll have access to...

Thank you, everyone. I've had a great weekend, and your kind wishes have made it all the better. bob

...and Grand Saloon afterwards!

Absolutely insane. Now if only my Spurs could land him....

A funny exchange from an NFL board I read: Petrino says Harrington is taking too long to get rid of the ball... so they try to sign Mr. Windup??? ... Nah, Lefty takes about 1 1/2 - 2 seconds to determine who he's throwing to then about 2 more seconds to actually release the ball...

You could say so. Then again, you could pretty much say the same for every day since the Falcons lost the NFC championship game to the Eagles at the end of the 2004-2005 season. They've been more or less lost in the wilderness since then. I think everyone knows this year is a lost cause...

The guy I like on that staff is OC Jason Garrett. He was that rarest of NFL QB's: the career backup who nobody thought could ever be a starter, yet was never out of a job. Tells you something about where his value lies. He has three rings from being on the sidelines with the Cowboys, but he was...

Eli will probably be okay, and he looked very good (against a depleted Cowboys secondary, but good noneless). Harrington is, and always has been, a scrub. I can't believe the Falcons aren't going after Leftwich, but evidently our new OC has a history with him, and they don't get along...

Whatever the rule book says, it's mostly a matter of the ref's common sense--which means you see some variation in how the rule is applied. The first thing to know is that interference can only happen: (1) when the pass is forward (i.e., not on a lateral) (2) while the ball is in the air...

I suppose that's true. I'd much rather explain football to a newbie than baseball; about the most complicated basic ingredient is the forward pass. Surprisingly, though--especially for a sport that has the reputation of being played by meatheads--football is incredibly complex, from the...

No. If you ever doubted that Stephon Marbury was a thug, those comments pretty well cleared it up.

In a word, abysmal. Over the summer they let their backup QB--Matt Schaub--go to the Texans, where he's now the starter. Then the Vick thing blew up. So now our starter is Joey Harrington, whose stench may have wafted your way if you turned your nose toward Miami last year, or Detroit for...

You definitely hit the trifecta on that one, Woody: dumb, geeky, and offensive. On the topic of lame math jokes (are there other kinds?), one due to Thomas Pynchon, although I don't imagine he invented it: \[\int \frac{1}{(cabin)} d(cabin) = \log{(cabin)} + c = houseboat\]

They only managed a draw at Anfield because the ref handed it to them. If the guys with the whistles closed their ears to Chelsea's incessant whining, there'd be a lot more results like last week's against Aston Villa.

My Premiership side: Spurs :wall My NFL team: the Atlanta Falcons :wall:wall As for who'll win it all this year.... In the NFL, the best team by a fair margin this year is the San Diego Chargers. They were last year, too. In the Premiership, it's hard to tell since Man U has been several...

I find this hilarious. A beautiful example of a feature sold as decreasing the risk of a product actually increasing it.

This is precisely my point. Commercial banks have gotten into the habit of securitizing to keep a cash equilibrium. They sell mortgages as soon as possible after origination; when they acquire another kind of asset with future cash flows, they pop it into an ABCP conduit, again recovering cash...

Another aspect of the liquidity freeze. The (cash) CDO and RMBS markets have basically seized up. The next one that looks ready to go is the ABCP market, which means banks themselves are going to be worried about their cash situations. The last thing anyone's going to do with that liquidity from...

The main advantages of containers--particularly vectors and maps--come from development speed, particularly ease of debugging. I like the dynamic memory management that comes with them, and I don't like having to write iterators or rule-of-three member functions (default constructors, copy...

Well, I wouldn't say this is the bottom on equities. They're down--what?--about 10% in the past month. Could be there's a little further to go. Certainly there's some corporate debt out there that's trading at appealing levels, though. Spreads may widen still more in the short term, but if...

Interesting and timely stuff. About the synthetics you mentioned above.... Remember that, whenever you do fixed income, there's a potential difference between the price of a security and its intrinsic value. A lot of synthetic CDO positions--indeed, a lot of long positions in corporate...

Another method, this time using <algorithm>. It doesn't retain the initial order, but it's a simple piece of code: void retain_unique (vector<int>& values) { sort (values.begin(), values.end()); vector<int>::iterator u_end = unique (values.begin(), values.end()); values.erase(u_end...

This solicits a list of integer inputs from the user, then outputs the number of subsets of each size, and lists the subsets. There's a more efficient way to code this, I'm sure, but this is what I came up with on a first pass. #include <iostream> #include <vector> #include <stdexcept>...

Whoever wrote these questions appears to like bitshift operators. I'd never used them before. The loop here isn't instrumental; it just tests the function with a range of input values. I hope doing this recursively doesn't count as looping.... #include <iostream> using namespace std...

I'm not much of a coder, but this one was simple enough for me: // exchange the values of doubles x and y x += y; y += x; x = y - x; y -= 2.*x; I suppose they might be after something related to pointers/references, but this was the way that occurred to me....

Good article. It points out the amount of risk that a CDO can disguise. When you wrap other structured securities into a CDO, the amount of leverage with respect to the underlying assets can be very high depending upon the quality of the assets themselves and how the liabilities are...

"The droids you're looking for" "All about BS" "Luck is for weaklings" or: "Luck is for weaklings. Can we have some, please?" "Mean squares seek supermartingales. You enjoy long walks on the beach, drinking wine by moonlight, and going short." :smt073

I haven't ever done it, and haven't checked out the auxiliary variables method msj cites, but from a quick look at the problem, it seems that as long as u = 1/d, binomial trees to price lookbacks do "recombine" in some sense. For example, consider the paths udu and duu. Both end at the same...

My $0.02 on matters discussed in this thread: (1)Buy a laptop. Get something reasonably fast, equipped with Office and an IDE that does C++. I've found that a simple but reasonably flexible graphing calculator application (one comes bundled with Mac OSX, don't know about Windows) can come in...

I understand that leaving is quite inexpensive.

My puppy Newton, who loves the snow.

I'm not an expert on the GRE (LSAT and MCAT are my specialties), but I know a little bit. The test is changing radically this fall--or so ETS says. They've already put off rolling out the new GRE general test once, although I'd be surprised if they put it off again. As long as you're taking...

This may be the answer they're after, but by choosing your "reference frame" the way you did, you actually assumed the answer a priori. The problem with the reasoning here is that the reference frame isn't inertial. Imagine using the same reasoning for an elastic collision between balls of...

1/2 is correct, and your reasoning sounds pretty good to me. What makes it work is that there are only two ways the outcome can be finally decided: by someone randomly choosing the jerk's seat, or else randomly choosing the last passenger's seat. The likelihood of these two outcomes is the same...

It turns out that I was wrong...about being wrong. The MC simulation was the part that wasn't correct; my original reasoning was fine. The answer to this one is in fact \(\frac{3}{4}\). We pick the first point at random, but it's really arbitrary. We can always rotate the circle and make...

You don't have the right answer to the airplane question. As to the annulus question, your answer is correct--it's \(16\pi\)--but the reasoning is not. In fact, one of the interesting things about this problem is that you can determine the area of the annulus, but not the radii of either...

If we select a jar first at random, then the probability that we select the jar containing only a red marble is 1/2. We will certainly draw red when we draw from this jar. Otherwise (probability 1/2), we select at random from the other jar, in which we have a probability of 49/99 of selecting a...

Two fun ones that are both pretty doable: 1. An airplane has N seats, and N passengers are waiting to board it, not in any particular order. Miraculously, everyone is assigned to a different seat on the airplane; however, the first passenger to board is a jerk and selects a seat at random...

I've seen this question before. I assume the way we "randomly pick one ball out of these 2 jars" is first to select a jar at random, then select a ball at random from that jar. In this case, you can get pretty close to making the probability of selecting a red ball \(\frac{3}{4}\): Put a single...

Nifty question. My gut was to say that the answer here is \(\frac{1}{4}\), since we're conditioning on the report of the roll, which gives us more information to work with. A closer look shows that this is a reasonable answer to the question, but not the only possible one.... This is actually a...

Actually, the answer here is \(\frac{1}{4}\). It's easy to only consider half the possibilities when you work this one. As Andy has said, this basically amounts to asking the question: Pick two points on the interval (0,1); what's the probability that none of the three resulting intervals is...

I'm pretty sure the correct answer to this one should be \(\frac{3}{4}\). EDIT: ...but it isn't. I'm still not sure why, but a quick MC simulation has convinced me that I'm missing something here. I'll take a look at it again when my brain's working a little better.

No, the answer to this is \(x=\sqrt{2}\) \(a=x^{x^{\ldots}}=2\) \(ln(x^{x^{\ldots}}) = ln2\) \(x^{x^{\ldots}}lnx = ln2\) \(a lnx = ln2\) \(2lnx = ln2\) \(lnx = \frac{1}{2}ln2\) \(lnx = ln\sqrt{2}\) \(x = \sqrt{2}\)

There've been a large number of "please rate my chances" threads in this forum. As much as we enjoy talking about our own program and are excited by the interest in, and the lively discussion of, its merits, there's something you need to understand: We cannot estimate your chances of admission...

2004--for Mac. :drinkers:

Riding the C train to work on the Upper West Side. We pulled into the Chambers Street / WTC station, and they held the trains for a couple minutes. Then I heard, for the first time in my life, actual panic in the conductor's voice as he shouted "Stand clear of the closing doors!" and we rocketed...