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I know overshoots are part of the market. I was saying I don't think your argument that more HFT get prices closer to a step function is always correct - maybe this can magnify the overshoots instead of getting prices to the next step faster. I firmly believe there is price-insenstitve...

Great posts Matt, thanks. Does anybody here know of a source to get ETF constituents in a machine-readable format for all the ETFs at once? Or all the ETFs in a family maybe?

I think you have some problems with the regression and PCA logic too but I am heading to bed.

This is okay - WN1 and WN2 have no memory. They are new random shocks each time, not some combination of the last random shock plus a new shock. So assuming they are stationary then any linear combination of them are stationary. Disclaimer- I don't remember all the definitions of...

I am kind of in a rush and I will try to look at this again later if you don't get if figured out, but I noticed something quick that might help. if x and y are random walks, then your u1(t) and u2(t) are really x(t-1) and y(t-1)

I would agree in most situations, but don't you think aggressive front running could mess this up? The scenario I am thinking of is a HFT takes liquidity in advance of say a price-insensitive mutual fund order, scares some more out of the book, then the mutual fund trade goes through at a worse...

Close. My answer is that it should drop by the after tax value of the dividend based on the tax rates of the major players in that stock. Of course subject to the market movements the other posters mentioned. There was a thread maybe 2 weeks ago in the trading section where this subject was...

Thanks, good stuff.

One thing I can add to DMO's answer - it is a lot easier to keep tabs on delta if gamma is low or neutral. Delta hedging can be tough, more gamma makes it tougher. The other stuff is true (the parts that I understand anyway) but this is a first order effect that shouldn't be underestimated.

Hi DMO, can I ask you a silly question? I am not familiar with the term premium neutral, I was confused at first because I thought it meant dollar premium sold = dollar premium bought but from your post I can tell this is not true. So is premium neutral just another way of saying...

Thanks for the compliment but right now arguing with him is a nice break from the work I should be doing!

You are right! And I suggest you complain to the managers of all merger arb funds, stat arb funds, vol arb funds, risk arb funds, etc. about their false advertising, that is an outrage that should not be allowed to continue. So for the true no-risk arb trades you do, are you really...

I think you would be right talking about Mom & Pop investors, but for institutions the decision is different. Low trading costs, very low marginal tax prep costs for another couple of trades, offset by a large dollar amount the tax savings would apply to.

I know it is a hard read with big words and symbols, but try again. 16 bps is if all stocks were pinned, if only 2% of stocks were pinned the estimate is over 800 bps. They have a good estimate of the overall dollar impact but are uncertain about how many stocks are pinned so for the per-stock...

You are getting hung up on semantics here. Replace the word arb with pseudo-arb if you want and see if you still object. I think you know that a "true" textbook arb is rare or non-existent, there almost always at least some execution risk. The word arb is commonly used loosely to mean a trade...

Actually the idea that the price should drop by the amount of the dividend is an oversimplification - there is a tax arb when different investors get different tax treatment. If everybody had the same tax situation and the taxes on capital gains and dividends were the same, the price drop...

I hear you but the study Nonprophet posted covers some of this. They compare how many stocks do expire close to a strike to how many would by chance, and put it in some nice histograms. They also give a simple regression model to predict the probability of a particular stock getting pinned. I...

But isn't that a type of pinning? If the stock price passes by the strike and gets stuck there (presumably by hyperactive delta hedgers) while the rest of the market keeps moving around? Even if our definitions don't match up exactly I still don't see why you think this is uninteresting...

Could you get a job painting animals? You could sing to them while you paint them.

Does anybody here use VWAP over some period as the mean?