Quantitative methods · Advanced · Daily
Mellin Transform Signal
How it works, and when it doesn't.
When Hawkes intensity is elevated, the probability of another large move within 24 hours is 3x the baseline rate. Reducing exposure during these periods significantly improves risk-adjusted returns.
Why it works
The Hawkes Process models volatility clustering — large market moves trigger further large moves because they create uncertainty, forced selling, and margin calls. By fitting a Hawkes intensity function to recent price data, the model detects when the market is in a high-jump-risk regime and reduces exposure accordingly.
The signal logic
- Fit Hawkes Process to magnitude of intraday returns
- Estimate current jump intensity via maximum likelihood
- Long when intensity is in bottom 40th percentile (calm regime)
- Watch when intensity is 40th-70th percentile
- Cash when intensity exceeds 70th percentile (high jump risk)
When it fails
The model can misidentify persistent trends as jump clustering, causing premature exits during strong bull markets.
- Best market
- Calm trending markets where jump clusters are rare and brief
- Worst market
- Earnings seasons and macro announcements that create sustained jump clustering
Backtest
This is a research tool rather than a directional strategy; it has no live signal of its own.
Mellin Transform Signal, live.
Re-scored after every close.
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