1. Introduction Important market events often have a variety of interpretations. For example, a recent Financial Times article outlined several different readings Facebook's "feeble showing... in the weeks since its $\mathdollar 16{\scriptstyle … [Continue reading]
Hong, Stein, and Yu (2007)
1. Motivation It's absolutely essential that people ignore most contingencies when making predictions in everyday life. Dennett (1984) makes this point quite colorfully by asking: "How is it that I can get myself a midnight snack? I suspect there … [Continue reading]
Two Period Kyle (1985) Model
1. Motivation This post shows how to solve for the equilibrium price impact and demand coefficients in a $2$ period Kyle (1985)-type model where informed traders see a noisy signal about the fundamental value of a single asset. There are various … [Continue reading]
Fano’s Inequality and Resource Allocation
1. Motivation This post describes Fano's inequality. It's not a particularly complicated result. After all, it first shows up on page 33 of Cover and Thomas (1991). However, I recently ran across the result again for the first time in a while, and … [Continue reading]
Wavelet Variance
1. Motivation Imagine you're a trader who's about to put on a position for the next month. You want to hedge away the risk in this position associated with daily fluctuations in market returns. One way that you might do this would be to short the … [Continue reading]