The tag has no usage guidance.

learn more… | top users | synonyms

22
votes
5answers
3k views

Why aren't econometric models used more in Quant Finance?

There is a big body of literature on econometric models like ARIMA, ARIMAX or VAR. Yet to the best of my knowledge practically nobody is making use of that in Quantitative Finance. Yes, there is a ...
0
votes
0answers
9 views

model to predict variable evolution [migrated]

Suppose that I have a set of variables X1 X2 and X3 that explain the evolution of a ...
0
votes
0answers
22 views

How to fit model implied forward curve with market forward curve for Ornstein-Uhlebeck?

I have a spread option model of 2 correlated Ornstein-Uhlenbeck commodity prices that I estimate the parameters of with Maximum Likelihood. What is the formula for introducing the additional ...
2
votes
0answers
75 views

Problems with a Black-Scholes modified equation

I haven't really studied much financial mathematics until about 2 months ago so I'm quite new to this stuff, so I'm sorry if this is a trivial question. At the moment I'm trying to work out what the ...
0
votes
2answers
68 views

Is there a way to meaningfully generate daily returns from monthly?

I have a set of 7 investments in a portfolio and I need to optimize the weightings based on some exposures to various markets/styles/economic factors. I was hoping to do some sort of simple exposure ...
3
votes
2answers
53 views

What is the effect of mean-reversion on an upper barrier knock-out call option?

Consider a mean-reverting normal model for an underlying $dX^{(1)}_t=-\kappa X^{(1)}_tdt+\sigma^{(1)} dW^{(1)}_t$, for fixed time-independent constants, $\kappa$ (mean-reversion) and $\sigma^{(1)}$ ...
2
votes
2answers
55 views

Automate selection of BIC-minimizing ARIMA(1,0,X) model

I want to estimate an ARIMA(1,0,X) model. The MA(X) in the model is selected to minimize BIC. I have the following code employing the function auto.arima from ...
1
vote
1answer
62 views

Generating random yields

I would like to test different methods for fitting a yield curve, like the Nelson-Siegel, cubic splines etc. I would like to generate random yield to maturity data, that somehow reflects the common ...
1
vote
0answers
53 views

Modeling Interest-only Mortgages

First post on this forum - happy to be here. Please give feedback if this is off-topic so I can more meaningfully contribute moving forward. Can we infer a range of future all-in costs for I/O ARMs ...
1
vote
2answers
90 views

Modelling and forecasting mixed frequency financial data

I was wondering if someone could provide some guidance to me. I would like to Combine various financial data of mixed frequencies (some daily, weekly, some quarterly) to a composite index. I have ...
2
votes
0answers
56 views

VAR models for log-returns?

I am wondering if Vector Autoregression (and other autoregressive models) is a sound modelling for the daily (not high-frequency!) log-returns of time series from liquid financial markets. One can ...
3
votes
1answer
110 views

Why do we usually use normal distribution and not Laplace distribution to generate stochastic process?

When working with a stochastic process based on brownian motion, the increments have normal (gaussian) distribution. However, it seems that a Laplace distribution, with density: $$f(t) = ...
6
votes
1answer
110 views

Modelling EUR/USD with Ornstein-Uhlenbeck + jumps?

I'm trying to simulate a process as close as possible to EUR/USD of the ten past years. I've used a Ornstein-Uhlenbeck process: $$d X_t = -\theta (X_t - \mu) d t + \sigma d B_t$$ with the ...
0
votes
2answers
135 views

Step By Step method to calculating VaR using MonteCarlo Simulations

In trying to find VaR for 5 financial assets with prices over a long period of time(2000 days worth of data) how would I do the following: Carry out monte-carlo simulation in order to find a VaR ...
1
vote
2answers
168 views

Geometric brownian motion vs. Ornstein Uhlenbeck

I'm looking at the SDE of Geometric brownian motion(*): $$d X(t) = \sigma X(t) d B(t) + \mu X(t) d t$$ (with analytic solution $X(t) = X(0) e^{(\mu - \sigma^2 / 2) t + \sigma B(t)}$) and the SDE of ...
1
vote
1answer
85 views

Portfolio of sum of two Bachelier processes

Suppose you construct a portfolio of two stocks, whose values $A$ and $B$ are modelled as a Bachelier process: $$dA = \sigma_A dW_A(t) \text{ and } dB = \sigma_B d W_B(t).$$ Each of the stock prices ...
1
vote
1answer
50 views

Methods or models to predict activity of clients of a bank

I'm a Physicist but I'd like to know if there are some methods or models to predict the activity of the clients of a bank. I heard that banks are interested in this sort of analysis so I got curious ...
1
vote
3answers
94 views

How is fundamental data taken into account when modelling stock prices with a Geometric Brownian Motion?

I have a basic understanding of the principles behind Geometric Brownian Motion and how it can be used to model stock prices, however I am confused as to how it is used in practice. In particular, how ...
1
vote
1answer
75 views

Obtaining the drift of a Wiener process formed from a random walk

I'm trying to understand how the equation for Geometric Brownian Motion is formed from a random walk. I'm following the book 'Statistics of Financial Markets' but I'm struggling to follow how the ...
1
vote
0answers
41 views

Is there anyone tried to use simultaneous stochastic differential equations?

I am looking for some examples or attempts of using simultaneous stochastic differential equations for financial analysis but there has been none so far. Is it just so nasty to apply such thing in ...
1
vote
1answer
34 views

Fitting (marginal/multivariate) distributions to financial return data

I have calculated the simple arithmetic return on a number of different financial securities and am fitting both a Student-T and Generalised Pareto Distribution. My question is can I just use the ...
0
votes
0answers
48 views

Modelling commodity price uncertainty with brownian motion - time period impacts

background I have two separate models of a metals resources company. Each model produces a series of accounting and cashflows forecast for different assets, and consolidates these to a overall ...
1
vote
1answer
30 views

Modeling credit utilization and stock market growth

I relatively new to financial mathematics but I am wondering if at all there exists a relationship between credit utilization (the rate at which the public accesses credit from financial institutions) ...
0
votes
0answers
82 views

residential mortgage prepayment modelling

I'm trying to develop a model for predicting prepayments, after reading several arcticles about it over the net. the model should use market data and be behavioral model (i.e. regression/survival ...
2
votes
2answers
434 views

Ideas about Stochastic volatility models

I am currently working on comparing different models for modelling the volatility and then pricing vanilla options (I use option prices on real stocks in order to calibrate my models and then I ...
0
votes
0answers
82 views

Examples for the option model validation

When implementing a code for the new model, even if it provides sensible price, it is still a good idea to compare it against some benchmarks, even in the special case of constant volatility ...
0
votes
0answers
54 views

calibration of Gaussian two factor short rate model

I am trying to calibrate the gaussian two factor short rate model whose dynamics is given by r(t)=x(t)+y(t)+phi(t) Now to calibrate the model to term structure ...
0
votes
1answer
32 views

Modeling EOD ETFs price returns together or individually?

Let's say you want to model the next day price returns for a set of US equities large cap ETFs (a relatively homogenous group). Would you model all the ETFs as a single, 15 years data set, or each ETF ...
7
votes
2answers
254 views

Quantitative Real Estate Investment Finance

I'm wondering if there is an application of quantitative finance to real estate investment? Specifically I'm wondering about models for pricing small neighborhoods (or even single houses) that take ...
3
votes
0answers
119 views

Fitting High Frequency Indicators

I have a high frequency time series of the bid and ask prices of a stock recorded on every tick. For each data point I also have a certain indicators that predict the future movement of the price. The ...
0
votes
0answers
11 views

FInding the Delta in margin based on Pricing, Unit Types, Product Mix, and Sale Types

Is there a way to find the change in margin based on the the changes in pricing, unit types, product mix and sale types? Is there a standard formula we can use? We have tried ...
1
vote
1answer
100 views

Covariance Matrix vs. Volatility Matrix

Consider a general multidimensional market model in which each of $m$ stocks is driven by $d$ Brownian motions (as in Shreve II, p. 226), viz. $$ dS_i/S_i = \alpha_i dt + \sum_{j=1}^d \sigma_{ij}dW_j, ...
12
votes
1answer
600 views

Models crumbling down due to negative (nominal) interest rates

Given that the negative interest rates on a lot of sovereign bonds with maturity under 10 years are trading in the negative (nominal) interest rate territory (recently also the short term EURIBOR has ...
5
votes
2answers
232 views

Covariance structure of call option surface

Assume the observed call option prices $C(K_i,T_i)$ for $i = 1,\dots,N$ are disturbed by some unknown measurement noise $\epsilon$. What would an appropriate covariance structure be for $\epsilon$? ...
0
votes
1answer
199 views

How to forecast bond price with time series

I have the goal of being able to develop a model that can forecast the future prices of european government bond (or other private bonds), particularly from the historical prices and returns of the ...
2
votes
0answers
128 views

How can I do a dynamic GARCH model using extended Kalman filter in R?

Today I was reading an article quoted here, in this article is proposed an adaptive (dynamic) Garch model. How can I do it in R? The use of extended Kalman filter or particle filter is indifferent. I ...
2
votes
2answers
150 views

How to compute the conditional expected value of a geometric brownian motion?

I'm working on a project, and I have to use the cumulative and conditional expected value of the variations of a stock following a Geometric Brownian Motion. I know that the cumulative is as follows ...
2
votes
3answers
458 views

How to estimate parameters of geometric brownian motion with time-varying mean?

Does anyone know how to estimate $A$, $\sigma_1$,$\sigma_2$ from the following system? $$dx = \mu_t x dt + \sigma_1 x dB_x$$ $$d\mu = A(\bar\mu - \mu) dt + \sigma_2 dB_\mu$$ Variation in $x$ could ...
2
votes
0answers
27 views

What methods - inspired by Haavelmo’s Structural Econometrics - can show that a partial equilibrium model is unreliable? [closed]

According to Spanos 2014 Revisiting Haavelmo's Structural econometrics: Bridging the gap between theory and data Dynamic Stochastic General Equilibrium models are statistically inadequate, in such an ...
3
votes
2answers
262 views

Black-Litterman, how to choose the uncertainty in the views $\Omega$ for smooth transitions form prior to posterior

In Black-Litterman we get a new vector of expected returns of the form: \begin{align} \Pi_{BL} = \Pi + \underbrace{\tau \Sigma P^T[P\tau\Sigma P^T+\Omega]^{-1}}_{\text{correction}}[Q-P\Pi] \end{align} ...
2
votes
2answers
272 views

Using Financial Ratios to get credit rating or PD

Hello I'm looking for papers, aside from ones that use CDS spreads, about credit rating development or estimating default probability based on financial ratios that also include methodology and maybe ...
4
votes
4answers
725 views

Credit Rating or Probability of Default from Financial Ratios

Does anyone know of any papers about credit rating development or probability of default estimation done based on financial ratios that also include methodology and maybe good/bad criteria? Something ...
3
votes
2answers
355 views

How to find the best fitting GARCH model for a portfolio composed of 3 ETFs in R?

I am doing a project for my class Financial Time Series in which I am trying to forecast my portfolio log returns using a GARCH fit. I am having a bit of trouble determining the best way to fit this ...
1
vote
1answer
108 views

How to model the effect of earnings surprises on long-term returns?

I'm looking into modeling the relationship between EPS announcement surprises with long-term returns (1 quarter to 3 years with intervals). I've based my current methodology off papers looking at the ...
4
votes
2answers
286 views

Predict Futures Prices based on weather + agricultural data

I’m working in the area of Data Mining and have come up with the following idea for my Masters project.The text may not be the best structured but it’s a working draft to give you a quick idea. ...
3
votes
2answers
432 views

How to select optimal betting strategy from backtest?

I have written a model for predicting the winner of UFC fights. My model calculates the probability of each fighter to win a given match. I have back tested the model and found it to be very ...
6
votes
8answers
5k views

Why should we expect geometric Brownian motion to model asset prices?

Disclaimer: I am a complete ignoramus about finance, so this may be an inappropriate forum for me to ask a question in. I am a mathematician who knows nothing about finance. I heard from a popular ...
3
votes
2answers
414 views

Resources for finding quantitative finance examples using excel, VBA and access

I am seeking to increase my knowledge in the quantitative finance field. I would be grateful if someone could point me to useful resource online, where I can find working examples of they types of ...
3
votes
1answer
2k views

How popular is the Linear Gauss Markov (LGM) model?

Some friends recommend to me Linear Gauss Markov model, saying it's interesting to have a look at it. Basically it's a framework different from HJM, with potential to extend, and the merit is that ...
3
votes
2answers
258 views

Modelling driftless stock price with geometric Brownian motion

I wish to understand some basic fact about the (primitive) simulation of stock prices with geometric Brownian motion. If $S(t)$ is the stock price at time $t$, and the stock price follows geometric ...