(1) create covariance matrix for a basket of assets (let's assume equities)
(2) calculate the eigenvectors and eigenvalues
(3) try to forecast the behavior of the eigenvectors of the largest eigenvalues, and do long-short basket trades to trade these eigenvectors.
Anyone else want to add/subtract from this?
one of my professors had a strong suspicion on them implementing a large scale Hidden Markov Model to infer macro variables. meh, what do i know.
yea, ur prof prob right on that. rentech does use "hidden" HMMs to try and figure the prob of a given market state depending on underlying state variables, but the state variables are raw financial variables (e.g.rates, or change rates), but a small # of finance-related HMMs try and figure the prob of a given market state by looking at staate variable that are derived from an an HMM process
anyone got opinions on applying learning techniques to finance (e.g. gaussian processes, linear dynamic systems)?
"I'm a fly Malcolm X, buy any jeans necessary."
when i think gaussian processes and linear dynamic systems i automatically think of T.I. and his music...great picture
is that what you're thinking of? they would never assume constant/linear matrices. prolly a combo of stochastic processes with pca as a lower bound.
i remember reading that they hire phds in many different things, such as linguists to analyze news announcements. i think they have a lot of ideas in their medallion fund.
standard quant model is pretty much a multi-factor model; i'm sure they use that to an extent.
Are we talking specifically about their medallion fund? I wonder who they PB with
WOW. RenTech works in mysterious ways.
"I'm a fly Malcolm X, buy any jeans necessary."
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