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Triangular arbitrage opportunities may only exist when a bank's quoted exchange rate is not equal to the market's implicit cross exchange rate. The following equation represents the calculation of an implicit cross exchange rate, the exchange rate one would expect in the market as implied from the ratio of two currencies other than the base currency.
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning ...
As a trading strategy, statistical arbitrage is a heavily quantitative and computational approach to securities trading. It involves data mining and statistical methods, as well as the use of automated trading systems. Historically, StatArb evolved out of the simpler pairs trade [3] strategy, in which stocks are put into pairs by fundamental or ...
Aggregators usually provide two main functions; they allow FX traders to compare price from different liquidity venues such as banks-global market makers or ECNs like Currenex, FXall or Hotspot FX and to have a consolidated view of the market. They allow traders to trade with many participants using a single API or a single trading terminal.
where E is the expected value operator. Notably, correlation is dimensionless while covariance is in units obtained by multiplying the units of the two variables. If Y always takes on the same values as X, we have the covariance of a variable with itself (i.e. ), which is called the variance and is more commonly denoted as the square of the ...
Correlation trading. In finance, correlation trading is a strategy in which the investor gets exposure to the average correlation of an index. The key to correlation trading is being able to predict when future realized correlation amongst the stocks of a particular index will be greater or less than the "implied" correlation level derived from ...
The correlation reflects the noisiness and direction of a linear relationship (top row), but not the slope of that relationship (middle), nor many aspects of nonlinear relationships (bottom). N.B.: the figure in the center has a slope of 0 but in that case, the correlation coefficient is undefined because the variance of Y is zero.
Pearson's correlation coefficient is the covariance of the two variables divided by the product of their standard deviations. The form of the definition involves a "product moment", that is, the mean (the first moment about the origin) of the product of the mean-adjusted random variables; hence the modifier product-moment in the name.
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