- Joined
- 2/18/10
- Messages
- 4
- Points
- 11
I am new to quant trading and unfamiliar with the financial jargon. However I have a physics background that allows me to understand the mathematical modelling of stock returns. I have found some physical models incorporated in the stochastic nature of returns like Stochastic Volatility models (difussion models), percolation theory, etc.
Let's say for instance that we have obtained the return prob. dist. func. which satisfies the Fokker-Planck eqn., and obtained a good fit for DJIA index (in this particular case). For this I have used Monte Carlo Simulations to find the parameters of the expOU Stochastic Vol. model, which shows a good fit to the data. I should be able to apply this model to an individual company stock time series, like Boeing, etc... may be it works for option pricing as well...this I can figure out by myself... Apparently this model is very robust...This I would like to know.
We can even simulate daily returns or monthly returns, etc...with the model to predict a return value within a certain error....All this is very nice...BUT, how can someone use this knowledge to design trading strategies?...For example...If I know the probability of negative daily or monthly return...then what?
Let's say for instance that we have obtained the return prob. dist. func. which satisfies the Fokker-Planck eqn., and obtained a good fit for DJIA index (in this particular case). For this I have used Monte Carlo Simulations to find the parameters of the expOU Stochastic Vol. model, which shows a good fit to the data. I should be able to apply this model to an individual company stock time series, like Boeing, etc... may be it works for option pricing as well...this I can figure out by myself... Apparently this model is very robust...This I would like to know.
We can even simulate daily returns or monthly returns, etc...with the model to predict a return value within a certain error....All this is very nice...BUT, how can someone use this knowledge to design trading strategies?...For example...If I know the probability of negative daily or monthly return...then what?