Blog Posts

Kalman Filters are used for estimating the state of a dynamic system from a series of incomplete and noisy measurements. Originating from control theory and employed in signal processing and finance, Kalman filters enable the efficient and real-time estimation of variables in systems governed by linear equations.   Key Takeaways – Kalman Filters Predicting Market […]

Extreme Value Theory (EVT) is a branch of statistics dealing with the extreme deviations from the median of probability distributions. It focuses on understanding the behavior of the tails of distributions, which is important in finance and risk management.   Key Takeaways – Extreme Value Theory (EVT) Risk Assessment EVT assesses the risks of rare, […]

The Beneish M-Score is a statistical model that is used to detect whether a company has manipulated its earnings. The model was created by professor Messod Beneish in June 1999 after publishing a paper called The Detection of Earnings Manipulation. The logic behind the Beneish M-Score is that a combination of aggressive revenue recognition practices, […]

The basic picture of the financial markets and macro-economies is very important to talk about when it comes to understanding what’s likely to transpire. Inflation, and changes in the discounted expectations of where inflation will go, is one of the main two overarching forces dictating how asset prices move (along with growth and its changes […]

Autocorrelation is the degree of similarity between a given time series and a lagged version of itself. In other words, it quantifies how similar a time series – e.g., interest rates, stock prices – is to itself at different points in time. A high autocorrelation means that the time series is highly similar to itself […]

In finance, Master Equations are a set of mathematical tools used to model and understand various financial processes. They mostly involve stochastic elements. These equations are used in quantitative finance for modeling the dynamics of financial markets and instruments.  They form the backbone of many advanced financial models, including those used for option pricing, risk […]

Spline models can be used in finance for modeling and interpolating financial data, which often exhibits non-linear patterns. These models are frequently applied in yield curve modeling, option pricing, and risk management.   Splines in Simple Terms A spline is a type of mathematical function used to create smooth curves. Imagine you have a series […]

Currency overlay is an investment strategy employed by institutional investors to protect their portfolios from currency fluctuations. The currency overlay manager first identifies the currency risk exposure of the portfolio, and then enters into currency hedging transactions to offset that risk. Currency overlay can be used to hedge both: currency risk arising from investments denominated […]

For traders, investors, and market participants, an understanding of various probabilistic, statistical, and analytical techniques is important for making good decisions when the future is unknown. Markets are heavily an applied probability exercise.  Each of these techniques and methods offers unique modeling capabilities and enables finance professionals to tackle specific and complex challenges – assessing […]

Bayesian analysis in finance, trading, and investing is a framework that incorporates probabilistic modeling and decision-making under uncertainty. This approach is based on Bayesian inference, where prior beliefs are updated with new information to form posterior beliefs.   Key Takeaways – Bayesian Methods in Finance Bayesian methods in finance offer a probabilistic framework for incorporating […]