Introduction to QF302

Transcription

1 Introduction to QF302 Christopher Ting Christopher Ting : christopherting@smu.edu.sg : : LKCSB 5036 January 6, 2017 Christopher Ting QF 302 Week 1 January 6, /20

2 Table of Contents 1 Introduction 2 Motivating Questions 3 QF and Hedge Fund Strategies 4 Assessment & Expectation Christopher Ting QF 302 Week 1 January 6, /20

3 Introduction Learning Objectives Discuss the main purpose and objectives of investment and financial data analysis. Define the main topics and develop an overview picture of QF302. Develop a strong motivation and passion for analyzing financial data by gaining an insight into how hedge funds make money. Identify and describe the assessment criteria clearly. Christopher Ting QF 302 Week 1 January 6, /20

4 Introduction Three Domains Financial Investment Theory asset pricing risk management Financial Statistical Modeling multivariate probability distributions estimation, testing, forecasts Financial Empirical Analyses time series data cross-sectional data Christopher Ting QF 302 Week 1 January 6, /20

5 Introduction Main Topics 1 Probability and Statistics 2 Global Markets 3 Return Distribution 4 Simple Linear Regression & Hedging 5 Capital Asset Pricing Model 6 Multiple Linear Regression and Multi-Factor Asset Pricing 7 High-Frequency Intraday Data Analysis 8 Time Series Models 9 Conditional Heteroskedasticity and Risk Management 10 Options and Implied Volatility Christopher Ting QF 302 Week 1 January 6, /20

6 Introduction Pedagogical Philosophy: Negative Aspects ג Finance is not a natural science (eg. physiology ) but a social science (eg. psychology). ג All models are imperfect lenses through which the financial world is gazed upon with various degree of delusion. ג Treat every assumption underlying the econometric model or financial investment theory as breaking news. ג Doubt is your best friend when interpreting the statistics generated by your arduous empirical analysis. ג When the empirical results do not match market reality, usually markets are right and the models wrong. ג And Markets can remain irrational a lot longer than you and I can remain solvent, said John Maynard Keynes. ג Many financial crises had happened. When crisis happens again, abandon the kaput models and scurry into the life boat of common sense. Christopher Ting QF 302 Week 1 January 6, /20

7 Introduction Pedagogical Philosophy: Positive Aspects ℵ In QF, there are three principles that are helpful for understanding what s going on in the financial market. ℵ By committing substantial talents and time to analyze the market with models, it is possible to gain consistently from trading and investment. ℵ Wealth at the global scale has grown and will continue to grow. ℵ To some market players, financial crisis is excruciatingly painful, but to some other players, crisis presents great opportunities to make lots of money. ℵ Success in the financial market is more or less independent of ones academic accolades; where Nobel laureates fail catastrophically, some high-school dropouts make it big. ℵ Yet R&D in QF is instrumental to expanding the entrepreneurs frontiers of trading and investment as a business. Christopher Ting QF 302 Week 1 January 6, /20

8 Motivating Questions Motivating Questions A. What s the point of exerting our minds and spending our funds on investment-related activities? B. In the context of investment, what s the point of financial data analysis? C. What s the difference between investment and trading? D. Are there early warning indicators of an economic downturn? E. Are there quant strategies that have an edge over gut-feel guesses? Christopher Ting QF 302 Week 1 January 6, /20

9 QF and Hedge Fund Strategies Overview of Hedge Fund Strategies HFR Strategy Classification Equity Hedge Event-Driven Macro Relative Value Fund of Funds Equity Market Neutral Activist Active Trading Fixed Income Asset Backed Conservative Fundamental Growth Credit Arbitrage Commodity Fixed Income Convertible Arbitrage Diversified Fundamental Value Distressed / Restructuring Agriculture Fixed Income Corporate Market Defensive Quantitative Directional Merger Arbitrage Energy Fixed Income Sovereign Strategic Sector Private Issue / Regulation D Metals Multi Volatility Energy / Basic Materials Special Situations Currency Yield Alternatives Technology / Healthcare Multi-Strategy Discretionary Energy Infrastructure Short Bias Systematic Real Estate Multi-Strategy Discretionary Thematic Multi-Strategy Systematic Diversified Multi-Strategy 2 HFR 2010 Hedge Fund Research, Inc. Christopher Ting QF 302 Week 1 January 6, /20

10 QF and Hedge Fund Strategies Equity Hedge Strategies Equity hedge strategies maintain positions both long and short in primarily equity and equity derivatives. A wide variety of methods are employed to arrive at an investment decision, including quantitative and fundamental techniques. Strategies are either broadly diversified or narrowly focused on specific sectors. They can vary broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations, and valuation spread of typical portfolios. Equity hedge managers typically maintain at least 50% exposure to, and may in some cases be entirely invested in, equities both long and short. Christopher Ting QF 302 Week 1 January 6, /20

11 QF and Hedge Fund Strategies Event Driven Strategies Event driven strategies maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety: mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from the most senior in the capital structure to the most junior or subordinated, and frequently involve additional derivative securities. Event driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments. Quantitative analysis on the fundamental characteristics of the capital structure is needed. Christopher Ting QF 302 Week 1 January 6, /20

12 QF and Hedge Fund Strategies Relative Value Strategies Using a variety of fundamental and quantitative techniques, relative value strategies are based on valuation discrepancy in the relationship between multiple securities. Security types can range broadly across equity, fixed income, derivative, or other security types. Fixed income strategies are typically quantitatively driven in measuring the existing relationship between instruments and, in some cases, identify attractive positions in which the risk-adjusted spread between these instruments represents an attractive opportunity. Exposures may be in corporate structure transactions as well. But in contrast to event-driven strategies, the focus is on the realization of a pricing discrepancy between related securities, as opposed to the outcome of corporate transactions. Christopher Ting QF 302 Week 1 January 6, /20

13 QF and Hedge Fund Strategies Macro Strategies Macro Strategies are broad. The investment process has its focus on movements in underlying economic variables and the impact these have on equity, fixed income, currency, and commodity markets. Macro strategies employ a variety of approaches, both discretionary and systematic, combinations of top-down and bottom-up processes, quantitative and fundamental analyses, with long and short term holding periods. Macro strategies are distinct from relative value strategies in that the primary investment decision is based on predicted or future movements in the underlying instruments, rather than realization of a valuation discrepancy between securities. Macro strategies are different from equity hedge strategies in that the overriding investment focus is on the impact on security prices from movements in the macroeconomic variables, as opposed to fundamental characteristics of the company. Christopher Ting QF 302 Week 1 January 6, /20

14 QF and Hedge Fund Strategies Equity Hedge: Quantitative Directional Strategies These strategies rely on quantitative techniques to analyze price data to ascertain information about future price movement and relationships among securities, and to select securities for purchase and sale. Factor-based investment strategies systematic analysis of common relationships among securities. Statistical arbitrage/trading strategies exploitation of pricing anomalies which may occur as a function of expected mean reversion inherent in security prices exploitation of new information yet to be reflected in current security prices technical analysis high frequency techniques Quantitative directional strategies typically maintain varying levels of net long or short equity market exposure over various market cycles. Christopher Ting QF 302 Week 1 January 6, /20

15 QF and Hedge Fund Strategies Equity Hedge: Market-Neutral Strategies Like quantitative directional strategies, market-neutral strategies use both factor-based and statistical arbitrage strategies. In many but not all cases, portfolios are constructed to be neutral to one or multiple variables, such as broader equity markets in dollar or beta terms, and leverage is frequently employed to enhance the return profile of the positions identified. Market-neutral strategies typically maintain characteristic net equity market exposure no greater than 10% long or short. Christopher Ting QF 302 Week 1 January 6, /20

16 QF and Hedge Fund Strategies Macro: Active Trading Strategies Use either discretionary or rule-based high-frequency strategies to trade multiple asset classes High portfolio turnover and trade duration of five days or less Analysis of historical and current prices and other technical, fundamental, and quantitative market data to determine trading opportunities lasting from a few seconds to a few days Momentum-based, mean reversion, or spread/arbitrage trades Frequently employ leverage, and are active across asset classes including equities, fixed income, foreign exchange, and commodity Utilize futures, and options, and are generally diversified in geography Characteristically emphasize rapid response to new fundamental and technical market information, generally utilize liquid markets, and often derive alpha from market volatility and instability Christopher Ting QF 302 Week 1 January 6, /20

17 QF and Hedge Fund Strategies Motivating Inspiration Renaissance Technologies Founded by James Simons and associates in Investment management company dedicated to producing superior returns for its clients and employees by adhering to mathematical and statistical methods. Largely stayed out of troubles in the meltdown Careers at Renaissance Computer Programmer Research Scientist Network Engineer System Administrator Christopher Ting QF 302 Week 1 January 6, /20

18 Assignments: 30% Assessment & Expectation Assessment Each group will be given different data sets for data analysis. Lab assignment is graded based on scientific correctness of the statistics obtained, relevant hypothesis used, correctness of inferences, timeliness in meeting the deadline, and any creative elements. Group Project 20% Presentations on Week 13 Final Exam: 40% MCQ and short questions Closed book, no cheat sheet Class Activity: 10% Ask questions enthusiastically Respond to questions with insightful comments Do not surf the web or check s during class unless asked to do so Christopher Ting QF 302 Week 1 January 6, /20

19 Assessment & Expectation Instructor s Expectations Be very hungry to learn quantitative analysis Design, develop, and evaluate quantitative investment/trading strategies Manage risk exposures at the portfolio level Value and hedge a portfolio Read the relevant chapters before coming for class Mathematics is your friend, not your enemy; it is the best language to communicate a notion with precision Indolence in preparation for coming to class and in after-class revision leads to lower grades Write the programs for data analysis yourself Writing and debugging programs is a creative process Programming gives you power to explore your imagination Fluent in Python is an asset on your CV Ask questions that are motivated by curiosity and the hunger to know and learn more Christopher Ting QF 302 Week 1 January 6, /20

20 Assessment & Expectation Main Reference Book Chapter 1 to Chapter 6 of Introductory Econometrics for Finance Excellent resource: 1 Prof Robert Nau: Statistical Forecasting 2 John Norstad s Finance Page Christopher Ting QF 302 Week 1 January 6, /20