H
HBO and Company, 196–197
Hedge, 10, 48, 151, 161, 162
Hedge ratio, 48, 49
Heuristics approach, 86
Hewlett Packard Company (HWP),
154–155
Historic volatility, 64I
Implied probability
of deal success, 172
of merger success, 172
Indexing, 81
Induction, 79
Innovation, 22
Information theory, 27, 179
Intel Corporation (INTC), 146, 147,
148
INTC-LEVL, 183
Integer linear program, 156J
Jenkins, Gwilym, 14K
Kalman, R.E., 53
Kalman filter/filtering, 52–69, 189–
190, 192, 194, 196, 197
applications to trading, 197–199
applying, 193–194
design, 200–204
filtering the random walk, 60–64
application to S&P index, 64–67
formulas, 69
Kalman filter, 53, 54–57
observation innovation, 56
scalar Kalman filter, 57–60
system state concept, 53
Karp, Richard, 79
Kirchoff’s law, 59L
Lagged values, 23, 196–197
Lazy allocation algorithm, 170
Least squares criterion, 111Level Communications (LEVL), 146,
147, 148, 183
Levy, Gustave, 141
Levy, P., 113
Lewis, Salim, 141
Linear programming, 158
Linear relationship, 106–107
Long–short portfolio, 6–7M
Macroeconomic factor models, 38
Market implied merger probability,
171–188
implied probabilities and Arrow-
Debreu Theory, 178
multistep model, 177–180
reconciling theory and practice,
180
risk management 184–186
event risk management, 185–186
VAR measurement, 184–185
single-step model, 175–177
Market neutral portfolios, 5
Market neutral strategy, 5–7
dollar neutral portfolios, 6
long–short portfolio, 6–7
market neutral portfolios, 5
mean-reverting behavior, 5–6
zero beta portfolio, 5–6
Market portfolio, 3
Markowitz approach, 40
Mark Twain, 127
Married puts, 166
Martingales, 23, 30
Max-flow formulation/problem,
158–159
Max flow–min cut theorem, 156
Maximization of profits, 118
Maximum entropy methods (MEM
methods), 132
Maximum likelihood criterion, 26
Maximum value of Brownian motion,
163
McKesson Inc., 196
Mean, 12
Mean drift, 99, 100, 104, 119, 136Index 207rm_01_idx_4273.qxd 6/24/04 1:49 PM Page 207