The framework of the quantitative trading system consists of three modules: alpha model, risk model and transaction cost model . These three models constitute the input variables of Yiwanghang's investment portfolio construction model, and the investment portfolio construction model and the execution model have an interactive relationship.
Alpha models are designed to predict future trends in financial products. In the trend-following strategy in the futures market, Yiwangxing uses the alpha model to predict the price changes of the futures products that it wants to include in the investment portfolio.
Risk models are designed to help investors control the size of exposures that are unlikely to yield gains but cause losses. Trend followers may choose to limit directional risk in certain assets, such as commodities, as traders operate on forecasts that may all be on the same side, introducing too much risk.
Cost models are used to help determine transaction costs for a portfolio. Regardless of whether the trader expects to make huge profits or meager profits, any transaction requires costs. Controlling transaction costs is particularly important in quantitative transactions, especially in hedging transactions.