Development in Intraday Volatility Forecasting

Posted 18 Dec 2013 — by Charles Martineau
Category Microstructure Measure, Risks, Uncategorized, Volatility

One of my cur­rent inter­est in microstruc­ture research is to under­stand what dri­ves intra­day volatil­ity in stock prices. Why? From an eco­nomic point of view, it is not so obvi­ous why intra­day volatil­ity mat­ters beside relat­ing intra­day volatil­ity to infor­ma­tion arrival. But from a prac­ti­cal point of view, it mat­ters. Take for exam­ple a tran­si­tion port­fo­lio man­ager that has for objec­tive to lower its trans­ac­tion cost. If price volatil­ity is high, we then expect a volatile bid-ask spread and mar­ket depth, which in turn increase trans­ac­tion cost. For this blog post, I sim­ply want to high­light a new research by Cont et al. (2014) in the Jour­nal of Finan­cial Econo­met­rics that attempts to mea­sure intra­day volatil­ity in a very clever way. But first, let me intro­duce you to the VPIN mea­sure devel­oped by Easley, Lopez de Prado and O’hara to fore­cast intra­day volatility.

The recent aca­d­e­mic arti­cle by Easley, Lopez de Prado and O’hara (2013) show that mar­ket order imbal­ance can antic­i­pate moments of intra­day tur­bu­lence in stock prices if we “deform” cal­en­dar time and com­pute the mar­ket order imbal­ance in vol­ume time. By deform­ing cal­en­dar time, it means to move away from reg­u­lar time tick like one minute or sec­ond time inter­val. Easley et al. (2012) sug­gest a volume-clock where the time inter­val length will be a func­tion of the trad­ing vol­ume activ­ity. Let say we start our trad­ing day at 9:30am and there is a high amount of vol­ume at the open­ing of the mar­ket then we can set our first time inter­val from 9:30:00 to 9:30:44 and the next one from 9:30:44 to 9:30:54 if vol­ume increases. If the amount of trad­ing vol­ume decreases from our last inter­val, then the end of the next inter­val may be at 9:33am and hence longer. For each of these inter­vals we com­pute the mar­ket order imbal­ance. The authors then sug­gest to sum the absolute value of the mar­ket order imbal­ance over mul­ti­ple inter­vals. Higher is the sum of order imbal­ance, higher the like­li­hood of high mar­ket volatil­ity. I have skipped a lot of details on the mea­sure but you get the essence.

Fol­low­ing the series of paper on the VPIN by Easley et al., Bon­darenko and Boller­slev (2013) pub­lished a paper in the Jour­nal of Finan­cial Mar­kets rebut­ting the abil­ity of the VPIN to antic­i­pate mar­ket volatil­ity. I won’t go much in the details, but it is worth the read. The debate between Easley et al. and Bodarenko and Boller­slev con­tin­ues here and here.

Then this brings the work of Cont et al. (2014). The author sug­gest a very clever way to “poten­tially” fore­cast intra­day volatil­ity. They don’t fore­cast volatil­ity per se but show that there is a high cor­re­la­tion between their mea­sure of order flow imbal­ance and mar­ket volatil­ity (or price changes). What I like about their mea­sure is that they com­bine both mar­ket order imbal­ance and liq­uid­ity pro­vi­sion imbal­ance. It is com­puted as follow:

L_k^b-C_k^b+M_k^b-L_k^s+C_k^s-M_k^s where L, C, and M stands for a limit order, can­cel of an order, and mar­ket order exe­cu­tion of a k order on the buy b or sell s side of the book.

As you can see, they incor­po­rate both the the imbal­ance of the mar­ket and limit side. They argue that when the limit order imbal­ance L_k^b-C_k^b-L_k^s+C_k^s is high, the mar­ket order imbal­ance M_k^b-M_k^s impact on stock prices becomes very noisy. How liq­uid­ity is pro­vided in mar­kets mat­ters to fore­cast and antic­i­pate mar­ket intra­day volatil­ity. It may actu­ally be more impor­tant than mar­ket order imbal­ance sim­ply because it is liq­uid­ity providers that set prices afterall.

What is yet to be done is to use their mea­sure to fore­cast volatil­ity both in cal­en­dar and vol­ume time… which I hope to take the time and test it out.

Last interview (I think) of Mandelbrot

Posted 27 Nov 2013 — by Charles Martineau
Category Fractals

That’s very nice…Happy to say that I study frac­tals …

HFT is an Artificial Industry” Presentation by Haim Bodek

Posted 25 Oct 2013 — by Charles Martineau
Category High-frequency Trading, Microstructure

Speed, machine, and co-location are the attrib­utes that we assign to HFT and the rea­son why HFT is often blamed for desta­bi­liz­ing mar­kets. But these attrib­utes are some­what irrel­e­vant if there are no spe­cial order types. Another superb pre­sen­ta­tion by Haim Bodek clar­i­fies this for us:


Market Fragmentation and Internalization Market Making

Posted 24 Oct 2013 — by Charles Martineau
Category Microstructure

There are 13 exchanges and over 40 alter­na­tive trad­ing sys­tems (e.g. dark pools) in the U.S. But some­thing I didn’t know was that mar­ket mak­ers can buy incom­ing order flow from your bro­ker and cherry pick the trades the mar­ket maker wish to trade against and route the “unwanted ones” to exchanges or ATS. Haim Bodek and Sang Lucci have two new videos to explain this:

A researcher is just like an entrepreneur

Posted 03 Sep 2013 — by Charles Martineau
Category Entrepreneur, Research

I often say to many that being a researcher is just like being an entre­pre­neur. We have a prod­uct to bring to the mar­ket, our research, and we have to mar­ket our research just like mar­keter. An entre­pre­neur takes risk. A lot of it. And the entrepreneur’s suc­cess is derived from the risk and often due to ran­dom­ness… Now I want to bring you to this web­site: which con­tains a series of videos of the top tech-entrepreneurs of our cur­rent time like Ever­note and Foursquare. They go through their fail­ures, where their busi­ness ideas comes from, etc. The key here is to lis­ten to some of these inter­views and seek to under­stand how their expe­ri­ence is related to the daily life of a researcher. You will see how sim­i­lar an entre­pre­neur and a researcher’s work and idea gen­er­a­tion are similar.

My favorite videos
Phil Libin (the guy behind Ever­note)

David Cop­per­field (YES the magi­cian)

Tony Hsieh (the guy behind Zap­pos)


Nassim Taleb and Seth Godin… They are somewhat similar no?

Posted 30 Jul 2013 — by Charles Martineau
Category Risks

I like the work of Nas­sim Taleb and Seth Godin and quite frankly, they share some very sim­i­lar views. See this video below of Seth Godin at Behind the Brand and Taleb’s lec­ture at Stand­ford (April 2013) and you will see that when it comes to risk and fail­ure… they are on the same page.

Ambient Noise / Music and Work

Posted 29 Jul 2013 — by Charles Martineau
Category Music, Research

A for­mer mar­ket­ing PhD stu­dent of UBC, Ravi Mehta, now assis­tant pro­fes­sor at the Uni­ver­sity of Illi­nois, pre­vi­ously research how ambi­ent noise can enhance cre­ativ­ity. The reasearch is now pub­lished in The Jour­nal of Con­sumer Research and the find­ings caught the atten­tion of many, par­tic­u­larly New York Times’ jour­nal­ist Ana­had O’Connor. As pointed out in the NYT’s arti­cle, ambi­ent noise like the noise found in cof­fee shops helps to focus the mind on cre­ative task. That is not sur­pris­ing to me. I am always search for good ambi­ent sound or music to lis­ten when I work and I see that my mind is def­i­nitely more focused when I hear some ambi­ent music or noise. A dead envi­ron­ment like a library is no good for me.  Here are two of my favorites albums to lis­ten to when I work:

Blade Run­ner Orig­i­nal Sound­track by Van­galis

Tim Hecker — The Ravedeath 1972

Job market and the “need to get picked”

Posted 22 Jul 2013 — by Charles Martineau
Category Education, PhD, University

I am far away (at least 3 years) from now until the aca­d­e­mic job mar­ket. Like any job mar­ket, the objec­tive is to get picked by one of your favorite employer. We usu­ally fall in the same rou­tine for the job mar­ket in hope to get “picked”: have a very good job mar­ket paper, pre­pare a strong pack­age to sub­mit to uni­ver­si­ties, pre­pare your inter­views and rehearse your job talks many times. These are cru­cial and nec­es­sary steps but can there be other cru­cial steps that we are for­get­ting? Seth Godin, which I con­sider one of the best philo­soph­i­cal mar­ket­ing guru on earth wrote a nice blog post on “Get­ting picked (need to vs. want to)”. We all want to get “picked” but maybe we have the “oblig­a­tion to seek a dif­fer­ent path” like Godin is say­ing or at least com­bin­ing the two paths: the tra­di­tional job mar­ket path and another one which may be truly unique to your per­son­al­ity. Are there any other paths?

What I talk about when I talk about running

Posted 19 Jun 2013 — by Charles Martineau
Category Books, Research

I am cur­rently read­ing a great (and short) book by the Japan­ese author Haruki Murakami titled “What I talk about when I talk about run­ning”. Murakami usu­ally writes great fic­tion nov­els such as Nor­we­gian woods or Wind-up bird chron­i­cle but this book is really what the title says… what he talks about when he runs. Murakami is a long dis­tance run­ner and run­ning is one of his pas­sion. This is like a sort of a mem­oir of Murakami’s life but you really have the sense that run­ning and push­ing his lim­its really helps him to write bet­ter nov­els. I also run, not as much as him nor do I run long dis­tance (usu­ally not more than 15km) but I run often. Run­ning helps me to solve my research prob­lems and it really helps to gen­er­ate news ideas for future research. We all face moments where we lack cre­ativ­ity and I believe run­ning helps to reju­ve­nate your cre­ativ­ity and that is the sense you get from read­ing Murakami’s book. I strongly sug­gest this lit­tle won­der­ful book to all researchers. Some of you will relate to Murakami’s pas­sion for run­ning because you are run­ners as well and for oth­ers, it might ini­ti­ate the desire to start running.

Resources on Value Investing

Posted 25 May 2013 — by Charles Martineau
Category Personal Finance, Research, Value investing

This post is resource page for those who wish to become value investors. First, I have to admit something…I am not really a value investor…yet! Value invest­ing is the “method­ol­ogy” of invest­ment that I appre­ci­ate the most and I wish to prac­tice value invest­ing as a pas­time (I want 50% of my port­fo­lio to derive from value invest­ing). But, let’s face it… I am a PhD finance stu­dent! So you know like me that there are few finance researchers that are suc­cess­ful investors or actu­ally talk about their own per­sonal finance expe­ri­ence. Have you ever heard a researcher in finance brag­ging about their suc­cess­ful invest­ments? Not much right? In my case, I started to invest at the end of my bach­e­lor stud­ies – quite late I have to say – but that is when I had enough money to open an account with a dis­count bro­ker and to really buy and diver­sify a port­fo­lio (you don’t need much actu­ally to start with…let’s say $5,000?). Dur­ing my mas­ters, I had received few bur­saries that allowed me to save more money and invest. I first started invest­ing my money in index funds such as short-term bonds, emerg­ing mar­kets, broad Chi­nese mar­ket (not cov­ered in tra­di­tional emerg­ing mar­ket index funds), inter­na­tional MSCI, and the U.S. stock mar­ket. My first pur­chase of an actual stock was Wells Fargo — after a sud­den drop in the mar­ket. There wasn’t much ratio­nal analy­sis behind this pur­chase. I was only tak­ing advan­tage of a sud­den, some­what irra­tional, drop in the mar­ket. You know like me that Wells is a solid busi­ness as we speak (accord­ing to Buffett).

Over the course of my bach­e­lor and mas­ter stud­ies, I read some books and blogs on value invest­ing. Despite the fact that my research spe­cialty that I wish to develop through my PhD has noth­ing to do with value invest­ing, I want to share all the great resources that I found and will con­tinue to find on the sub­ject. I also do this for my future stu­dents… I wish I had a pro­fes­sor that would have done the same : )

How to get acquainted with value invest­ing? (very briefly…)

First and fore­most you must readThe Intel­li­gent Investor” by Ben­jamin Gra­ham. This step is cru­cial! Next, I would jump on read­ing mul­ti­ple blogs on the sub­ject of value invest­ing. Many give insights on their suc­cess­ful invest­ments, ana­lyze var­i­ous stocks using the value invest­ing method­ol­ogy and show you their steps of analy­sis, pro­vide you with resources to eval­u­ate your own stocks, give you mul­ti­ple insights on which stock that you should pay a close atten­tion to, and more impor­tantly learn from their mistakes!

Key Blogs:

The Frog’s Kiss – very detailed and well writ­ten analy­sis of stocks

Odd­ball Stocks – detailed and super clear analy­sis of net-net stocks (and other types). Also pays close atten­tion to inter­na­tional stocks. One of my per­sonal favorite blogs

Above Aver­age Odds Invest­ing – very pop­u­lar and detailed analy­sis of stocks

Barel Karsan – cov­ers var­i­ous top­ics on value investing

Clas­sic Value Investors – cov­ers var­i­ous top­ics on value invest­ing, pro­vides inter­views with finan­cial man­agers, and some stock analysis

Old School Value (OSV) – One of my per­sonal favorite web­site on value invest­ing. Pro­vides analy­sis, var­i­ous insights, and more impor­tant the author of this site devel­oped an amaz­ing value invest­ing tool to ana­lyze stocks (more on that later)

Long-Term Value

Value Uncov­ered

Tools of analysis

Once you get the habit of pay­ing a close atten­tion to these blogs (use Google Reader to keep track of blogs!) I highly sug­gest you to turn to Old School Value stock analy­sis tool for $137 (really good invest­ment – trust me!). For indi­vid­ual like us who can’t really put our hands on Cap­i­tal IQ or Bloomberg – this is the best tool out there. And to some extent, I am will­ing to say that OSV stock analy­sis tool beats both Cap­i­tal IQ and Bloomberg for its sim­plic­ity and on other aspects (price, etc.)

I would also sug­gest two stock screen­ers. Many use the Finan­cial Times stock screener avail­able (free) and a paid stock screen­ing tool (min $24 per month) from

Key steps to fol­low in your val­u­a­tion… basi­cally how to invest!

A very good tuto­r­ial on how to invest in terms of what step to fol­low in your research and val­u­a­tion of stocks is pro­vided on the OSV web­site by the author’s friend Ernie. This tuto­r­ial is like a men­tal map­ping of the steps to fol­low to increase your chance of suc­cess with your investments.

Addi­tional Resources

Val­u­a­tion Mul­ti­ples: A Primer” is doc­u­ment writ­ten by UBS in 2001 on val­u­a­tion mul­ti­ples. It is clear, con­cise, and cov­ers if not all the key val­u­a­tion mul­ti­ples: how to use the mul­ti­ples in the val­u­a­tion of a stock, their lim­i­ta­tions / draw­backs, etc.  This doc­u­ment was found by OSV and Jae Jun (the author of OSV) declares that this is the best val­u­a­tion doc­u­ment available!

Fur­ther readings…

Ben­jamin Gra­ham and David Dodd – Secu­rity Analy­sis … a mas­ter­piece! I would sug­gest how­ever the 1951 edi­tion avail­able here sim­ply because you don’t need to go through the accompanied-CD for the appendices.

Many have told me that I must read this fol­low­ing book:

Seth Klar­man — Mar­gin of Safety: Risk-Averse Value Invest­ing Strate­gies for the Thought­ful Investor

This book is out of print, really hard to find, but is avail­able on the web in PDF (you have to search!). I haven’t read this one yet but I will!