*🚀 Master Quantitative Skills with Quant Guild* *📅 Meet with me 1:1* *📈 Interactive Brokers for Algorithmic Trading* *👾 Join the Quant Guild Discord server here* ___________________________________________ *🪐 Jupyter Notebook* %20Video%20Lectures/49.%20Markov%20Chains%20for%20Quant%20Finance/ TL;DW Executive Summary: - When modeling something as a random variable *independence* is way too strong of an assumption that can lead to extremely inaccurate models - A major correction can be applied by considering the simplifying assumption of local conditional dependence rather than full independence - Markov chains effectively model these dynamics and enable us to estimate probabilities and expectations from an initial state given a local dependency structure - The transition matrices and corresponding probabilities can be easily estimated from data using the result from MLE - Though Markov chains aid in the modeling process offering more *accurate* or *reasonable* estimates there are many assumptions that are still violated in practice - Typically, Markov chains are a first step in the modeling process (regime switching or HMM models, for example) - understanding them is the first step toward more comprehensive applications I hope you enjoyed! - Roman ___________________________________________ *📖 Chapters:* 00:00 - Markov Chains 03:59 - Random Variables 07:11 - Modeling Uncertain Events 11:27 - Stochastic Processes 13:22 - Independence 14:28 - Real World Example 20:15 - Markov Chains 25:04 - State Transition Probabilities 27:40 - Multi-Step Transition Probabilities 29:53 - Example: Multi-Step State Transition Probability 31:12 - Example: State Distribution Vector 36:48 - Key Properties of Markov Chains 37:26 - Applying Markov Chains in the Real World 38:55 - Maximum Likelihood Estimation (MLE) 41:38 - Real World Quant Model 43:49 - Key Properties and Assumptions of the MLE 46:02 - TL;DW Executive Summary ___________________________________________ *🗣️ Shout Outs* A special thank you to my members on YouTube for supporting my channel and enabling me to continue to create videos just like this one! *⭐ Quant Guild Directors* Dr. Jason Pirozzolo ___________________________________________ *▶️ Related Videos* *Quant Builds 🔨* How to Build an Options Volatility Trading Tool in Python with Interactive Brokers How to Build a Volatility Trading Dashboard in Python with Interactive Brokers *Statistics and Trading Profitability Over Time (Edge) 📈* Expected Stock Returns Don't Exist How to Trade How to Trade Option Implied Volatility How to Trade with an Edge How to Trade with the Kelly Criterion Quant Trader on Retail vs Institutional Trading Quant on Trading and Investing ___________________________________________ *🗂️ Resources* *📚 Quant Guild Library:* *🌎 GitHub:* *📝 Medium (Blog):* ___________________________________________ *🛠️ Projects* *The Gaussian Cookbook:* *Recipes for simulating stochastic processes:* ___________________________________________ *💬 Socials* *TikTok:* @quantguild *Instagram:* *X/Twitter:* *LinkedIn (personal):* *LinkedIn (company):* ___________________________________________