ExperimentalFinanceLecture-1L

ExperimentalFinanceLecture-1L - Experimental Finance IEOR...

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Unformatted text preview: Experimental Finance IEOR Columbia University Mike Lipkin, Pankaj Mody Experimental Finance Mike Lipkin, Alexander Stanton Page 2 Outline Why? Laboratory Focus IVY Database Initial Setup and Using the Database http://www.modusinc.com/experimentalFinance Experimental Finance Mike Lipkin, Alexander Stanton Page 3 Why? Theory: Conventional Finance Theories determine the l real z price, and show mispricings of the market. Theories are just that theories. They dont explain everything. Practice: Mike Classical theory doesnt hold in practice, and there are plenty of opportunities to make (and lose) money through strategies that exploit this gap. The trick is using intuition, observation and plenty of back testing, both to find them and to minimize losses when ( not if ) they occur. Implementation: The Lab It doesn ` t matter whether you favor theory or l traditional z trading, i.e. games playing without rigorous testing, the process will be quite painful. Unexpected problems, insufficient, bad, late and unexpected data all make for a fun time. The better you are at a blend of all three modes, the higher the likelihood of success and the lower your stress levels Experimental Finance Mike Lipkin, Alexander Stanton Page 4 Why? Well be taking a look at how conventional theory can be at odds with real-life trading Well do lots of back-testing and explore the impact of known / unknown events. Can predictions be made? We ` ll be looking at how practical constraints affect an analyst ` s ability to evaluate theories, monitor signals and execute trading strategies Data latencies, computation times and execution costs all impact an analyst ` s ability to do what may be theoretically possible Your ability to blend theory, practice and the right amount of skepticism will directly determine your PNL Experimental Finance Mike Lipkin, Alexander Stanton Page 5 Why? A few examples: Execution costs, hardware speed Regulations require market makers to provide liquidity, i.e. quote a certain number of options. The solution is to quote out of the money options very wide in order not to get hit, but what if things move without your algorithm being fast enough to catch it? Strategy pre-calculation across entire market takes 7 hours to run nightly. What happens when the nightly feed goes down, or everything but the dividend data comes in, or the admin crashes the server by playing solitaire on it, or....
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ExperimentalFinanceLecture-1L - Experimental Finance IEOR...

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