Finding Alphas, 2nd Edition

17Thinking in Algorithms

By Sunny Mahajan

A good quant should be a jack of all trades and, with time and experience, a master of some. Effectively navigating various unexplored landscapes requires skill, care, and the right set of tools to get you to your destination in one piece. With the passage of time and technological progress, we have discovered many new ways of making this journey more quickly and more safely. Manipulating huge swaths of structured as well as unstructured datasets in the hope of making it to that ever-lucrative alpha is no less than an expedition, and algorithms serve as our trusted advisers on these exciting adventures.

To stay competitive, you need to be well equipped and, more importantly, you need to choose the right tool for the job. Even with the right tool, you have to make a decision between finesse and brute force. In predictive modeling, knowing how to walk this fine line makes all the difference. That said, let's take a look at some of the mathematical techniques and algorithms that should be part of your quant tool kit. We will go through the underlying intuition and the practical use cases for these algorithms.

DIGITAL FILTERS

Digital filters perform mathematical operations on discrete time signals to attenuate or amplify certain frequencies. These mathematical transforms are characterized by transfer functions that describe how they respond to various inputs. As such, digital filter design involves expressing performance specifications ...