لایب سان

Author(s): Robert Kissell

Publisher: Academic Press, Year: 2020

ISBN: 0128156309,9780128156308

CHAPTER 9 Machine Learning Techniques........................................................ 221 Introduction ............................................................................................... 221 Types of Machine Learning...................................................................... 224 Examples ................................................................................................... 225 Cluster Analysis ................................................................................... 225 Classification ............................................................................................. 228 Regression................................................................................................. 229 Neural Networks ....................................................................................... 231 CHAPTER 10 Estimating I-Star Market Impact Model Parameters .......................... 233 Introduction ............................................................................................... 233 I-Star Market Impact Model ..................................................................... 234 Scientific Method ...................................................................................... 235 Step 1: Ask a Question ........................................................................ 235 Step 2: Research the Problem .............................................................. 235 Step 3: Construct a Hypothesis............................................................ 235 Step 4: Test the Hypothesis ................................................................. 236 Step 6: Conclusions Communicate ...................................................... 236 Underlying Data Set............................................................................. 245 Data Definitions ................................................................................... 248 Imbalance/Order Size ........................................................................... 249 Average daily volume .......................................................................... 249 Actual market volume.......................................................................... 249 Stock volatility ..................................................................................... 249 POV Rate ............................................................................................. 249 Arrival Cost.......................................................................................... 250 Model Verification ............................................................................... 250 Model Verification #1: Graphical Illustration...................................... 251 Model Verification #2: Regression Analysis ....................................... 251 Model Verification #3: z-Score Analysis............................................. 251 Model Verification #4: Error Analysis ................................................ 252 Stock Universe ..................................................................................... 252 Analysis Period .................................................................................... 252 Time Period.......................................................................................... 252 Number of Data Points ........................................................................ 252 Imbalance ............................................................................................. 252 Side....................................................................................................... 253 Volume ................................................................................................. 253 Turnover ............................................................................................... 253 VWAP .................................................................................................. 253 Contents xi First Price ............................................................................................. 254 Average Daily Volume ........................................................................ 254 Annualized Volatility ........................................................................... 254 Size ....................................................................................................... 254 POV Rate ............................................................................................. 255 Cost ...................................................................................................... 255 Estimating Model Parameters .............................................................. 255 Sensitivity Analysis.............................................................................. 257 Cost Curves .......................................................................................... 262 Statistical Analysis ............................................................................... 262 Stock-Specific Error Analysis .............................................................. 265 CHAPTER 11 Risk, Volatility, and Factor Models ................................................. 269 Introduction ............................................................................................... 269 Volatility Measures ................................................................................... 270 Log-Returns.......................................................................................... 270 Average Return .................................................................................... 270 Variance ............................................................................................... 270 Volatility............................................................................................... 271 Covariance............................................................................................ 271 Correlation............................................................................................ 271 Dispersion............................................................................................. 271 Value-at-Risk........................................................................................ 272 Implied Volatility ...................................................................................... 272 Beta ...................................................................................................... 273 Range.................................................................................................... 273 Forecasting Stock Volatility ..................................................................... 274 Volatility Models ................................................................................. 274 Determining Parameters via Maximum Likelihood Estimation .......... 277 Historical Data and Covariance ................................................................ 280 False Relationships............................................................................... 281 Degrees of Freedom ............................................................................. 283 Factor Models ........................................................................................... 288 Matrix Notation.................................................................................... 289 Factor Model in Matrix Notation......................................................... 290 Types of Factor Models ............................................................................ 292 Index Model ......................................................................................... 292 Macroeconomic Factor Models............................................................ 293 Statistical Factor Models...................................................................... 295 xii Contents CHAPTER 12 Volume Forecasting Techniques ..................................................... 301 Introduction ............................................................................................... 301 Market Impact Model ............................................................................... 301 Average Daily Volume ............................................................................. 303 Methodology ........................................................................................ 303 Definitions ............................................................................................ 303 Monthly Volume Forecasting Model................................................... 304 Analysis................................................................................................ 304 Regression Results ............................................................................... 306 Observations Over the 19-Year Period: 2000e18 ................................... 306 Observations Over the Most Recent 3-Year Period: 2016e18 ................ 308 Volumes and Stock Price Correlation.................................................. 309 Forecasting Daily Volumes....................................................................... 309 Our Daily Volume Forecasting Analysis is as Follows....................... 310 Variable Notation ................................................................................. 311 ARMA Daily Forecasting Model......................................................... 311 Analysis Goal ....................................................................................... 311 Step 1. Determine Which is More Appropriate: ADV or MDV and the Historical Look-Back Number of Days ................................. 312 Conclusion #1 ...................................................................................... 312 Step 2. Estimate the DayOfWeek(t) Parameter .................................... 314 Conclusion #2 ...................................................................................... 314 Step 3. Estimate the Autoregressive Parameter bb................................ 315 Forecast Improvements ........................................................................ 316 Daily Volume Forecasting Model........................................................ 316 Conclusion #3 ...................................................................................... 316 Forecasting Intraday Volumes Profiles ................................................ 317 Forecasting Intraday Volume Profiles.................................................. 320 Predicting Remaining Daily Volume................................................... 321 CHAPTER 13 Algorithmic Decision-Making Framework ......................................... 323 Introduction ............................................................................................... 323 Equations................................................................................................... 324 Variables............................................................................................... 324 Important Equations ............................................................................. 325 Algorithmic Decision-Making Framework............................................... 325 Select Benchmark Price ....................................................................... 326 Comparison of Benchmark Prices ............................................................ 329 Specify Trading Goal ........................................................................... 330 Specify Adaptation Tactic.................................................................... 337 Contents xiii Projected Cost ...................................................................................... 338 Comparison Across Adaptation Tactics ................................................... 345 Modified Adaptation Tactics..................................................................... 346 How Often Should we Reoptimization Our Tactic?............................ 347 CHAPTER 14 Portfolio Algorithms and Trade Schedule Optimization ...................... 349 Introduction ............................................................................................... 349 Trader’s Dilemma ..................................................................................... 351 Variables............................................................................................... 351 Transaction Cost Equations ...................................................................... 352 Market Impact ...................................................................................... 353 Price Appreciation................................................................................ 353 Timing Risk.......................................................................................... 354 One-Sided Optimization Problem ........................................................ 354 Optimization Formulation......................................................................... 354 Constraint Description.......................................................................... 355 Portfolio Optimization Techniques ........................................................... 358 Quadratic Programming Approach ...................................................... 358 Trade Schedule Exponential ................................................................ 360 Residual Schedule Exponential............................................................ 361 Trading Rate Parameter........................................................................ 362 Comparison of Optimization Techniques ............................................ 364 Portfolio Adaptation Tactics ..................................................................... 368 Description of AIM and PIM for Portfolio Trading ............................ 370 How Often Should we Reoptimize? .................................................... 371 Appendix .............................................................................................. 372 CHAPTER 15 Advanced Algorithmic Modeling Techniques ..................................... 375 Introduction ............................................................................................... 375 Trading Cost Equations ............................................................................ 375 Model Inputs ........................................................................................ 376 Trading Strategy................................................................................... 376 Percentage of Volume .......................................................................... 377 Trading Rate......................................................................................... 377 Trade Schedule..................................................................................... 378 Comparison of POV Rate to Trade Rate ............................................. 378 Trading Time ............................................................................................ 378 Trading Risk Components ........................................................................ 379 Trading Cost ModelsdReformulated.................................................. 380 Market Impact Expression ................................................................... 380 Timing Risk Equation .......................................................................... 382 xiv Contents Derivation of the 1/3 Factor................................................................. 384 Timing Risk For a Basket of Stock ..................................................... 387 Comparison of Market Impact Estimates............................................. 388 Forecasting Covariance ........................................................................ 390 Efficient Trading Frontier .................................................................... 391 Single Stock Trade Cost Objective Function....................................... 393 Portfolio Trade Cost Objective Function ............................................. 394 Managing Portfolio Risk...................................................................... 395 Residual Risk Curve ............................................................................ 395 Minimum Trading Risk Quantity......................................................... 397 Maximum Trading Opportunity........................................................... 398 When to Use These Criteria? ............................................................... 400 Program-Block Decomposition............................................................ 400 CHAPTER 16 Decoding and Reverse Engineering Broker Models with Machine Learning Techniques .................................................................... 405 Introduction ............................................................................................... 405 Pre-Trade of Pre-Trades............................................................................ 406 I-Star Model Approach ........................................................................ 407 Neural Network Model Approach ....................................................... 413 Portfolio Optimization .............................................................................. 416 What Should the Portfolio Manager Do? ............................................ 419 Deriving Portfolio Optimization Market Impact Models .................... 419 Example: Share Quantity Regression Model....................................... 420 Example: Trade Value Regression Model ........................................... 425 CHAPTER 17 Portfolio Construction with Transaction Cost Analysis ........................ 429 Introduction ............................................................................................... 429 Portfolio Optimization and Constraints .................................................... 430 Transaction Costs in Portfolio Optimization ............................................ 434 Portfolio Management Process ................................................................. 437 Example: Efficient Trading Frontier With and Without Short Positions .............................................................................................. 437 Example: Maximizing Investor Utility ................................................ 438 Trading Decision Process ......................................................................... 439 What is the Appropriate Optimal Strategy to Use? ............................. 440 Unifying the Investment and Trading Theories........................................ 441 Which Execution Strategy Should the Trader Use? ............................ 443 Cost-Adjusted Frontier.............................................................................. 445 Determining the Appropriate Level of Risk Aversion ............................. 447 Best Execution Frontier ............................................................................ 448 Contents xv Portfolio Construction with Transaction Costs......................................... 449 Quest for Best Execution Frontier ....................................................... 451 Example .................................................................................................... 456 Important Findings ............................................................................... 464 Conclusion ................................................................................................ 466 CHAPTER 18 Quantitative Analysis with TCA ...................................................... 469 Introduction ............................................................................................... 469 Quantitative Overlays........................................................................... 469 Market Impact Factor Scores ............................................................... 469 Cost Curves .......................................................................................... 469 Alpha Capture ...................................................................................... 470 Investment Capacity............................................................................. 470 Portfolio Optimization.......................................................................... 470 Backtesting ........................................................................................... 470 Liquidation Cost................................................................................... 471 Sensitivity Analysis.............................................................................. 471 Are The Existing Models Useful Enough For Portfolio Construction?....................................................................................... 472 Current State of Vendor Market Impact Models ................................. 473 Pretrade of Pretrades ................................................................................. 475 Applications ......................................................................................... 476 Example #1 .......................................................................................... 476 Example #2 .......................................................................................... 477 Example #3 .......................................................................................... 477 Example #4 .......................................................................................... 477 How Expensive is it to Trade? ................................................................. 478 Acquisition and Liquidation Costs....................................................... 481 Portfolio ManagementdScreening Techniques .................................. 484 Backtesting Strategies ............................................................................... 487 Market Impact Simulation ........................................................................ 490 Simulation Scenario ............................................................................. 491 Multi-Asset Class Investing ...................................................................... 495 Investing in Beta Exposure and Other Factors .................................... 495 Example #5 .......................................................................................... 495 Multi-Asset Trading Costs........................................................................ 498 Global Equity Markets ......................................................................... 500 Multi-Asset Classes.............................................................................. 501 Market Impact Factor Scores .................................................................... 508 Current State of Market Impact Factor Scores .................................... 510 xvi Contents Market Impact Factor Score Analysis ...................................................... 510 Alpha Capture Program ............................................................................ 512 Example #6 .......................................................................................... 513 Example #7 .......................................................................................... 514 Alpha Capture Curves.......................................................................... 516 CHAPTER 19 Machine Learning and Trade Schedule Optimization.......................... 519 Introduction ............................................................................................... 519 Multiperiod Trade Schedule Optimization Problem................................. 520 Setting up the Problem......................................................................... 520 Trader’s Dilemma Objective Function................................................. 521 Nonlinear Optimization Convergence ...................................................... 523 Newton’s Method................................................................................. 525 Example #1 .......................................................................................... 526 Example #2 .......................................................................................... 527 Machine Learning ..................................................................................... 528 Neural Networks .................................................................................. 530 Neural Network Errors......................................................................... 531 Machine Learning Training Experiment................................................... 531 Step I: Generating Simulated Trade Baskets ....................................... 532 Step II: Compile Stock and Basket Data Statistics.............................. 532 Step III: Solve the Multiperiod Trade Schedule Optimization Problem ............................................................................................... 534 Step IV: Train the NNET..................................................................... 535 Step V. Calculate the Initial Parameter Values for the NNET ............ 536 Principal Component Analysis............................................................. 536 Stepwise Regression Analysis.............................................................. 536 Neural Network Structure .................................................................... 539 Neural Network Error .......................................................................... 539 Performance Results ................................................................................. 540 Conclusions............................................................................................... 542 CHAPTER 20 TCA Analysis Using MATLAB, Excel, and Python ................................ 543 Introduction ............................................................................................... 543 Transaction Cost Analysis Functions ....................................................... 545 Transaction Cost Model............................................................................ 547 MATLAB Functions................................................................................. 549 Excel and Python Functions ..................................................................... 549 TCA Report Examples.............................................................................. 550 Conclusion ................................................................................................ 558 Contents xvii CHAPTER 21 Transaction Cost Analysis (TCA) Library ........................................... 559 Introduction ............................................................................................... 559 TCA Library......................................................................................... 560 Transaction Cost Analysis Using the TCA Library ................................. 561 List of TCA Functions ......................................................................... 565 Bibliography.................................................................................................................... 569 Index ............................................................................................................................... 577

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