A problem when designing a trading system is the overfitting phenomenon, wherein the system is excessively tuned to historical data. Overfitting occurs when a trading strategy performs exceptionally well on past data but fails to generalize to new, unseen data. This can lead to false positives and inflated expectations, as the system may appear profitable due to chance rather than true predictive power. To mitigate overfitting, traders often employ techniques such as cross-validation and out-of-sample testing to ensure that their strategies remain robust across various market conditions and time periods. Another technique to prevent overfitting involves selecting a parameter region, often referred to as a "plateau," where the trading system maintains stable performance. Reference [1] introduced a method for quantifying this plateau and utilized particle-swarm optimization to search for it. The authors pointed out, In this study, the concept of a parameter plateau was introduced, developing a plateau score algorithm, with the aim of replacing the conventional method of directly transferring the best-performing parameters from the training set to the testing set. The plateau score algorithm was effective in avoiding parameter islands, showcasing stable performance with a high probability. Experimental results illustrated that parameters with elevated plateau scores exhibit similar or improved performance on the testing set compared to the training set. This experimental validation underscores the substantial impact of the proposed parameter plateau definition and algorithm on parameter selection. Subsequently, a more intricate trading strategy was examined, entailing a substantial increase in the number of parameters to be explored. In this context, unified design coupled with particle swarm optimization was employed to compute the plateau scores. An experiment encompassing the search for parameters in two- to six-dimensional trading strategies was conducted. The integration of PSO in plateau score computation significantly enhanced search efficiency compared to the brute-force method, yielding commendable final search parameters. Subsequently, an experiment involving the fine-tuning of hyperparameters for PSO in the parameter plateau was conducted. Disregarding search time considerations, a hyperparameter range was proposed for the parameter plateau applicable to PSO. In short, the extent of plateau stability is quantified, and an efficient optimization algorithm is utilized to search for it. The out-of-sample test results show promise. Let us know what you think in the comments below or in the discussion forum. References [1] Jimmy Ming-Tai Wu, Wen-Yu Lin, Ko-Wei Huang, Mu-En Wu, On the design of searching algorithm for parameter plateau in quantitative trading strategies using particle swarm optimization, Knowledge-Based Systems, Volume 293, 7 June 2024, 111630 Originally Published Here: Avoiding Overfitting: Searching for Parameter Plateau
0 Comments
What are Bilateral Agreements?Bilateral agreements are fundamental instruments in international relations and commerce, facilitating mutually beneficial arrangements between two parties. In this blog post, we'll explore the scope, examples, advantages, and disadvantages of bilateral agreements to gain a deeper understanding of their significance in various contexts. Scope of Bilateral AgreementsA bilateral agreement, also known as a bilateral treaty or pact, is a formal arrangement between two parties, typically sovereign states or entities, to address specific issues or pursue common goals. These agreements cover a wide range of areas, including trade, investment, defense, environmental protection, and cultural exchange, among others. Bilateral agreements can take various forms, such as trade agreements, investment treaties, extradition treaties, and military alliances. Examples of Bilateral Agreements- Trade Agreements: Bilateral trade agreements aim to facilitate commerce between two countries by reducing tariffs, quotas, and other trade barriers. An example is the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, which aimed to promote economic integration and free trade among the signatory nations. - Investment Treaties: Bilateral investment treaties (BITs) are agreements between two countries to promote and protect investments made by investors from one country in the territory of the other. For instance, the Germany-United States BIT provides legal protections for German investors operating in the United States and vice versa. Advantages of Bilateral Agreements- Tailored Solutions: Bilateral agreements allow parties to tailor arrangements to their specific needs and interests, fostering flexibility and customization in addressing shared challenges. - Enhanced Cooperation: By focusing on the interests of two parties, bilateral agreements can promote deeper cooperation and collaboration, leading to more effective outcomes compared to multilateral negotiations involving numerous stakeholders. - Efficiency: Bilateral agreements often enable quicker decision-making and implementation compared to multilateral negotiations, allowing parties to achieve outcomes more efficiently and effectively. Disadvantages of Bilateral Agreements- Exclusivity: Bilateral agreements may create exclusive partnerships between parties, potentially limiting opportunities for broader cooperation or marginalizing other stakeholders. - Complexity: Negotiating and implementing bilateral agreements can be complex and time-consuming, requiring significant resources and expertise from both parties. Additionally, divergent interests and priorities may complicate the negotiation process. - Limited Scope: Bilateral agreements may overlook broader regional or global issues that require collective action, potentially hindering progress on pressing global challenges such as climate change or cybersecurity. ConclusionIn conclusion, bilateral agreements play a crucial role in shaping international relations and fostering cooperation between countries or entities. While they offer numerous benefits, including tailored solutions and enhanced cooperation, they also present challenges such as exclusivity and complexity. Therefore, careful consideration and strategic planning are essential when entering into bilateral agreements to ensure that the interests of all parties are effectively addressed. Originally Published Here: Bilateral Agreements: Definition, Scope, Examples, Advantages, Disadvantages When it comes to trusts and beneficiaries, distributable net income plays a major role. It is essentially the amount of income that can be distributed to beneficiaries without incurring additional tax liabilities. It is a base amount that is used to calculate the trust's tax liability and determine how much income can be distributed to beneficiaries. By understanding how distributable net income works, trustees can make informed decisions about when and how to distribute trust funds. What is Distributable Net Income?Distributable Net Income (DNI) is a financial term used to describe the maximum income that can be distributed to trust beneficiaries without incurring additional taxes. Essentially, it serves as a tax-efficient income source for recipients of a trust. When calculating DNI, one starts with the taxable income of the trust, adjusts it by either deducting any capital gains or adding any capital losses, and finally, includes the exemption. Any income that exceeds the calculated DNI is not subjected to tax. In simple terms, DNI is the amount of money that a trust can distribute to beneficiaries without incurring additional tax liabilities. How Distributable Net Income WorksDistributable Net Income (DNI) is a concept used by the IRS to approximate the financial benefit a beneficiary receives from a trust or estate. This income source provides beneficiaries with steady earnings while minimizing the trust's tax liability. Like individuals, estates and non-grantor trusts, which operate independently from the grantor, are required to file income tax returns. The income they report is taxed either at the entity or beneficiary level, depending on its allocation and distribution. To avoid double taxation, U.S. tax law allows estates and trusts to deduct distributed income or DNI, whichever is less. So basically DNI serves as a way to determine the maximum amount of income that can be distributed without resulting in additional taxes for beneficiaries. Calculating Distributable Net IncomeHere is the formula for calculating DNI Distributable Net Income (DNI) = Taxable Income – Capital Gain (or + Capital Loss) + Tax Exemption Where, Taxable income: This includes all the income earned by the trust, including rental income, interest income, dividends, and capital gains. Capital Gain: Any profits made from selling assets during the tax year. Capital Loss: Any losses incurred from selling assets during the tax year. Tax Exemption: A certain amount of income that is not subjected to taxes. Any income that exceeds the calculated DNI is not subjected to tax, making it a beneficial tool for both trust and beneficiary. Example of How DNI WorksLet's assume a trust earns $50,000 in interest income and $30,000 in rental income during the tax year. The trust also sells an asset for a capital gain of $20,000. They also got a tax exemption of $2,000. First, the taxable income needs to be calculated: Taxable Income = $50,000 + $30,000 + $20,000 - $2,000 = $98,000 Now using the formula for calculating DNI, the DNI can be calculated as DNI = Taxable Income – Capital Gain (or + Capital Loss) + Tax Exemption = $98,000 - $20,000 + $2,000 = $80,000 This means the trust can distribute up to $80,000 as income without any additional tax burden for the beneficiaries. Any amount over $80,000 would be subjected to taxes for both the trust and beneficiary. ConclusionTaxes are complicated and expensive but understanding the concept of DNI can help trusts and beneficiaries effectively manage their income distribution. By calculating DNI, both parties can maximize their financial benefits while avoiding unnecessary tax burdens. Tax professionals would be able to guide businesses better in utilizing DNI for your specific trust and beneficiary situation. Post Source Here: Distributable Net Income: Definition, Calculation, Formula, Example A budget is a financial plan that serves as a benchmark against which a company can compare its financial results. However, having a plan alone does not suffice. Companies must have a robust budgetary control process to make it worthwhile. What is Budgetary Control?Budgetary control is a strategic and systematic approach for companies to manage their financial activities by comparing planned budgets with actual results. Beginning with creating detailed financial plans, the budgetary control process involves obtaining approval from relevant stakeholders before implementation. Once in action, companies continuously monitor and report actual financial performance against the budget, analyzing variances to understand the underlying reasons. This ongoing scrutiny allows for early identification of discrepancies and provides a basis for corrective actions, such as adjusting spending or reallocating resources. How does Budgetary Control work?Budgetary control is a comprehensive and cyclical framework guiding companies through the intricacies of financial planning, monitoring, and adjustment. The process commences with creating detailed budgets that encapsulate anticipated revenues, expenses, and capital outlays for a defined period, subject to approval from relevant stakeholders. Following approval, the company implements the budget by allocating resources and setting financial targets for different departments, fostering accountability in financial responsibilities. Through consistent monitoring and reporting mechanisms, actual financial performance is regularly scrutinized against the budgeted figures, prompting a detailed analysis of variances to uncover underlying reasons. This variance analysis is a foundation for informed decision-making and guides companies in taking corrective actions, whether through adjusting spending, reallocating resources, or implementing changes to enhance overall financial performance. What are the four principles of Budgetary Control?The principles of budgetary control form the foundation for the effective implementation and management of budgetary processes within a company. These are often referred to as the “Four C’s” of budgetary control and are below. Clear objectivesBudgetary control begins with establishing clear and well-defined objectives. These objectives should align with the overall goals and strategy of the company. Clarity in objectives ensures that the budget is a targeted tool for achieving specific outcomes. CommunicationEffective communication is crucial throughout the budgetary control process. It involves disseminating the budget targets and fostering open communication channels for feedback and reporting. Transparent communication helps ensure that everyone involved understands their roles and responsibilities. CoordinationCoordination is essential to align the efforts of different departments and individuals toward the common goals outlined in the budget. It involves harmonizing activities, resources, and timelines to avoid conflicts and promote synergy across the company. ControlControl is the core principle, emphasizing the continuous monitoring of actual performance against budgeted figures. Regular evaluation of variances allows for timely identification of discrepancies, enabling management to take corrective actions and keep the company on track. Why is the importance of Budgetary Control?Budgetary control is instrumental for companies, offering a structured approach to financial planning and management reverberating across various facets of their operations. At its core, it serves as a compass for financial activities, aligning them with strategic goals and fostering efficient resource allocation. By setting spending limits and financial targets, budgetary control empowers companies to prioritize initiatives and enhances accountability by monitoring actual performance against budgeted figures. This proactive approach to financial oversight supports effective decision-making and serves as a mechanism for identifying and addressing cost overruns or inefficiencies. ConclusionBudgetary control is a process that helps companies manage financial activities. Essentially, it is a benchmark against which a company can measure its actual results. It works on four principles, clear objectives, communication, coordination, and control. Budgetary control is highly crucial for companies in achieving financial goals. Article Source Here: Budgetary Control: Definition, Process, System, Principles, Example, Importance Leveraged ETFs, or exchange-traded funds, are investment funds designed to amplify the returns of an underlying index or asset class through the use of financial derivatives and debt. These ETFs aim to achieve returns that are a multiple of the performance of the index they track, typically two or three times (2x, 3x) the daily performance. There is evidence that 1x ETF options provide an indication of the future return of the underlying 1x ETF. Reference [1] goes further and postulates that options on leveraged ETFs provide an even stronger indication of the 1x ETF future return. The authors pointed out, This study examines the informational content of options on leveraged ETFs and their ability to predict the performance of the underlying ETF. We argue that sophisticated traders, who prefer leveraged securities, are likely to trade leveraged ETFs to capture broad market exposure. Consequently, to effectively hedge or speculate on these leveraged positions, informed investors might turn to options on leveraged ETFs. Following this reasoning, we construct a measure of informed trading in these options using innovations in the implied volatility of call and put options on leveraged ETFs. Our results provide strong empirical support for our proposition. Specifically, we document that both levered and unlevered option signals predict future returns of the underlying ETFs. While both signals are statistically significant, the economic significance of the levered signal is notably stronger. For instance, a $1 investment based on a levered signal for SPY produces a net return of $27.59, adjusting for transaction costs, over the period from 2009 to 2021. Our findings highlight the importance of leveraged products, particularly options on leveraged ETFs, in price discovery within the market. In short, by using the difference in implied volatility innovations between calls and puts of leveraged ETFs as a trading signal, one can gain excess returns. Let us know what you think in the comments below or in the discussion forum. References [1] Collin Gilstrap, Alex Petkevich, Pavel Teterin, Kainan Wang, Lever up! An analysis of options trading in leveraged ETFs, J Futures Markets. 2024, 1–17 Originally Published Here: Information Content of Leveraged ETFs Options In the world of finance, the concept of the daily trading limit plays a crucial role in maintaining stability and preventing extreme volatility in the markets. Let's delve into what daily trading limits are, their purposes, how they work, and some criticisms surrounding their implementation. What is the Daily Trading Limit?The daily trading limit, also known as the price limit or circuit breaker, is a predetermined threshold imposed by stock exchanges to regulate the price movement of a security within a single trading session. These limits are designed to prevent excessive fluctuations in prices and curb panic-driven buying or selling, thereby promoting market stability. Purposes of Daily Trading Limits
Limit Up and Limit DownThe daily trading limit typically consists of two components: the limit up and the limit down. - Limit Up: The limit up refers to the maximum price increase allowed for a security during a single trading session. When a security's price reaches the limit-up threshold, trading may be temporarily halted, preventing further price escalation. - Limit Down: Conversely, the limit down represents the maximum price decrease permitted for a security within a trading session. If a security's price hits the limit down level, trading may be halted to prevent further downward pressure on prices. Example of Daily Trading LimitSuppose Company XYZ's stock is subject to a daily trading limit of 10%. If the stock's price increases by more than 10% from its previous closing price, trading may be halted temporarily to allow market participants to digest the new information and prevent speculative trading activity. Criticism of Daily Trading LimitsWhile daily trading limits serve important purposes, they have also faced criticism from some quarters. Critics argue that: - Market Inefficiency: Daily trading limits can sometimes impede the efficient pricing of securities by preventing prices from reflecting new information in a timely manner. - Reduced Liquidity: Trading halts triggered by daily trading limits can lead to reduced liquidity in the market, making it challenging for investors to buy or sell securities at desired prices. ConclusionIn conclusion, while daily trading limits play a crucial role in maintaining market stability and managing risk, they are not without their drawbacks. Striking the right balance between stability and efficiency remains a key challenge for regulators and market participants alike as they navigate the dynamic landscape of financial markets. Article Source Here: Daily Trading Limit Perfect competition is used to describe a market structure in which businesses only make just enough profit to keep running. It is considered the most ideal market structure because it leads to the efficient allocation of resources and benefits both consumers and producers. Perfect competition often gets overlooked because no one wants to be in the same position forever, but it provides key insights into market dynamics and how to succeed in a competitive landscape. By understanding how it works, businesses can stay competitive and consumers can receive products at the best possible prices. What is Perfect Competition?Perfect competition is a theory in economics - it's not often seen in real-life markets, but it's a good model to show how prices change based on what's for sale and what people want to buy. In a perfect competition market, there are lots of buyers and sellers - prices are set by what's available and what people want. Businesses make just enough money to keep going - if they made more, new businesses would start up and profits would go down. This theory gives a clear and simple view of how markets work, without any personal views or feelings. In simple words, perfect competition means that there are enough businesses selling a product or service to keep the market competitive - so no one company can control the market. How Perfect Competition WorksPerfect competition works as a benchmark to the other market structures. It's completely opposite of a monopoly, where there is only one seller and the market can be controlled. In perfect competition, businesses are price takers - they have no control over the price of their product or service. This is because there are so many businesses offering similar products that consumers can easily go to another business if the price is too high. This forces businesses to set a competitive price in order to stay in the market. What makes perfect competition unique is that it's a self-regulating system. Inefficient businesses will be forced to either improve or exit the market, while efficient businesses will thrive. They have to follow an ecosystem where the price charged for their product or service is determined by market forces of supply and demand. Characteristics of Perfect CompetitionHere are some of the key characteristics of perfect competition:
ConclusionAlthough perfect competition is a theoretical idea, it can still serve as a useful standard for real-world markets. It emphasizes the significance of competition in encouraging businesses to continuously enhance and innovate, which ultimately benefits consumers with better quality products at lower prices. While perfect competition may not exist in reality, it still plays a critical role in evaluating the effectiveness and competitiveness of markets. Originally Published Here: Perfect Competition: Definition, Market, Meaning, Example, Graph There are several types of funds in governmental accounting, each serving specific purposes and accounting for different activities. These funds fall into three broad categories, including governmental, fiduciary, and proprietary funds. Furthermore, each category can have its classifications. One of the classifications within proprietary funds is enterprise funds. What is an Enterprise Fund?An enterprise fund in governmental accounting serves as a distinct financial mechanism to separate activities that closely resemble those of a private business or commercial entity. Unlike governmental funds catering to general government functions, enterprise funds are designated for self-sustaining ventures. These funds operate on a business model, generating revenue by selling goods or services to the public. In essence, enterprise funds are a specialized accounting tool that enables governments to efficiently manage and track revenues and expenditures associated with business-oriented activities. By delineating these self-supporting ventures, such as utilities and transportation services, governments can better assess their financial viability. How does the Enterprise Fund work?Enterprise funds function as specialized financial entities within governmental structures, designed to manage business-like activities independently. The primary mechanism involves generating revenue by selling goods or services such as utilities, parking, or public transportation. The funds operate on a self-sufficiency principle, where the generated revenue covers all associated costs, including operational, maintenance, and capital expenses. This separation facilitates distinct financial statements, budgeting, and accounting practices, providing clarity in evaluating the financial performance of each enterprise fund. Financial management within enterprise funds encompasses budgeting, accounting for assets and liabilities, and conducting regular performance evaluations. Performance evaluations help assess the efficiency and effectiveness of the funds. What is the importance of the Enterprise Fund?Enterprise funds hold significant importance within governmental structures, offering a strategic framework that enhances financial transparency and accountability. By segregating business-like activities, these funds enable clear and distinct financial reporting, providing stakeholders with an inclusive understanding of the performance of each self-sustaining operation. This transparency fosters public trust and facilitates effective decision-making by policymakers. The direct correlation between revenue generation and associated costs ensures accountability, as financial challenges or successes get attributed to the specific enterprise fund. This separation promotes adherence to accounting standards and reporting requirements, contributing to accurate and reliable financial reporting that aligns with regulatory frameworks. Moreover, enterprise funds play a vital role in promoting efficient resource management and strategic decision-making. What is the accounting for Enterprise Fund?Accounting for enterprise funds involves thorough financial management to ensure transparency, accountability, and compliance within government operations. Significant financial statements, such as the Statement of Net Position and the Statement of Revenues, Expenses, and Changes in Fund Net Position, serve as crucial tools for portraying the financial health and performance of each enterprise fund. Budgeting is crucial, guiding governments in outlining revenue expectations, expense allocations, and capital expenditures for business-like activities. Revenue recognition centers on accurately recording income earned through the sale of goods or services. On the other hand, expenses get recognized as incurred in delivering those services. Asset and liability accounting ensures the balance sheet reflects the infrastructure, equipment, and financial obligations with enterprise funds. ConclusionAn enterprise fund is a fund category in governmental accounting. This category includes all revenues and expenses from goods or services provided to the public and is self-sustaining. Enterprise funds are highly crucial as they enhance transparency and accountability. The accounting for this fund occurs through the statement of net position and the statement of revenues, expenses, and changes in fund net position. Originally Published Here: Enterprise Fund: Definition, Accounting, Importance, Example A catastrophe bond, commonly referred to as a cat bond, is a type of insurance-linked security that allows insurers and reinsurers to transfer the risk associated with catastrophic events, such as natural disasters, to capital market investors. These bonds are typically issued by insurance companies or special purpose vehicles (SPVs) and are designed to provide financial protection against specified catastrophic events, such as hurricanes, earthquakes, or pandemics. In the event of a qualifying catastrophe, the issuer may not have to repay some or all of the principal to investors, thereby providing much-needed funds to cover the losses incurred by the insured parties. However, if no qualifying event occurs during the bond's term, investors receive periodic coupon payments and the return of their principal at maturity. An earthquake bond is a type of catastrophe bond, in which an insurer, reinsurer, or government, transfers a portion or all of the earthquake risk to investors in return for higher yields. Earthquake bonds are crucial in countries prone to earthquakes. However, pricing them presents challenges. Reference [1] developed a pricing model for earthquake bonds. The authors pointed out, This research presents an EB pricing model involving inconstant event intensity and the maximum strength of extreme earthquakes under the risk-neutral pricing measure. Focusing on extreme earthquakes simplifies the modeling process and data collection and computing time compared to considering the infinite frequency of earthquakes occurring over a continuous time interval. The inconstant intensity of the event is accommodated by an inhomogeneous Poisson process, while the maximum strength is modeled using extreme value theory (EVT). Then, the model is applied to earthquake data in Indonesia, the country with the second highest frequency of earthquakes worldwide. Finally, the variable sensitivities of EB prices are also analyzed. In short, the authors modeled the risk-free interest rate using the Cox–Ingersoll–Ross model. They accommodated the variable intensity of events with an inhomogeneous Poisson process, while extreme value theory (EVT) was used to model the maximum strength. This paper makes an important contribution to the pricing of catastrophe bonds, aiding countries in effectively managing risks associated with natural disasters. Let us know what you think in the comments below or in the discussion forum. References [1] Riza Andrian Ibrahim, Sukono, Herlina Napitupulu and Rose Irnawaty Ibrahim, Earthquake Bond Pricing Model Involving the Inconstant Event Intensity and Maximum Strength, Mathematics 2024, 12, 786 Originally Published Here: A Pricing Model for Earthquake Bonds Risk shifting is a common practice in the business world, where companies transfer or mitigate risks they face. It involves various strategies aimed at minimizing the potential negative impact of uncertain events. Let's delve deeper into what risk shifting entails, its types, alternatives, and more. What is Risk Shifting?Risk shifting is the process of transferring or managing risks from one party to another. Companies often employ this strategy to protect themselves from potential losses associated with various uncertainties, such as market fluctuations, legal liabilities, or natural disasters. By shifting risks to other parties or implementing risk management techniques, companies aim to safeguard their financial stability and ensure business continuity. Types of Risk Shifting
Alternatives to Risk ShiftingWhile risk shifting is a prevalent risk management strategy, it's essential to explore alternative approaches to address risks effectively. Instead of merely transferring risks to external parties, companies can focus on risk mitigation and prevention measures. Proactive risk management strategies may include:
ConclusionIn conclusion, while risk shifting is a common risk management strategy, companies should carefully evaluate its implications and explore alternative approaches to address risks effectively. By adopting a proactive and diversified risk management approach, businesses can enhance resilience and ensure sustainable growth in an increasingly uncertain business environment. Article Source Here: Risk Shifting: Definition, Types, Examples, Alternatives |
Archives
April 2023
|