Usefulness of econometrics in trading
I am a junior undergraduate student studying math and computer science, and I have an upcoming internship at a prop trading firm this summer. Right now for my computer science degree I am registered for a database management systems class for this upcoming semester, but I have the opportunity to register for an econometrics class instead. This class is known to be difficult and would be purely an elective, so I am wondering if it is useful at all for trading, and if it is, the extent to which it is. To me it seems like it could be useful since it covers regression and time series models, but I'm not completely sure.
squidwardtortellini0, bummer your thread hasn't had a response yet. Maybe one of these threads could point you in the right direction:
Any pros willing to rescue this discussion? vko007 Sean-Ryan1 Eddie Braverman
I hope those threads give you a bit more insight.
It might be useful in the sense that you will learn to work with time series. Econometrics specifically will typically not be used at a typical prop firm.
Yes… options traders do, or at least I do day-to-day. For example, I use the GARCH model to forecast index volatility over the next 30 days and depending on the forecast, I may buy or sell the 30-day at the money straddle on the index options or make no trade. Having this kind of forecast actually gives me an edge… No, it won’t make trades for me, the risk is all me, but it helps me with to gain a better view. If my forecast of implied volatility is greater than the current implied volatility then I might think that the market prices of call and put options are too low and I should buy them, and if the forecast of implied volatility is significantly less than implied volatility than I would sell them. There are a lot of useful things you can do knowing econometrics… This is one of many.
Some great points have been put up. Another reason why you should take econometrics is because it can help you in the long term.
A rigorous study of econometrics will go a long way in making you stand out too.
Do (if so which?) trading desks on the sell-side use econometrics alot (Originally Posted: 09/05/2008)
Cause I would like studying more of regression diagnostics, non-linear dynamics, analysis of real time series, etc at a higher level. What are the limitations of their application to finance and in what type of analysis of what type of markets are they currently applied.
who can answer what I'm babbling about?
i did a fair amount of econometrics in school. it's used more to build pricing models on the quant side, and can be applied to almost any market - rate curves, default risk, derivative pricing, etc.
it is not a useless subject for a trader to study, however, because it gets you thinking critically about sets of data and trends, but you won't be doing actual econometrics as a trader. some desk researchers and strategists are prone to whipping out slightly advanced stat, but there are just as many who are more intuitive/qualitative.
these are just my observations - rates and derivatives guys may shine some more light on this
Stat Arb and Algorithmic Trading are some of the applications of Time Series
If you can digest Hamilton in Time Series, you can be a quant!
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