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30
votes
6answers
5k views

Which approach dominates? Mathematical modeling or data mining?

According to my current understanding, there is a clear difference between data mining and mathematical modeling. Data mining methods treat systems (e.g., financial markets) as a "black box". The ...
24
votes
2answers
4k views

How useful is Markov chain Monte Carlo for quantitative finance?

Naively, it seems that Bayesian modeling, structural models particularly, would be quite useful in finance because of their ability to incorporate market idiosyncrasies and produce accurate ...
14
votes
2answers
1k views

From a high frequency point of view, with a price prediction and assuming infinite leverage, how do you determine optimal trade size?

I have read about something like Kelly criterion for long term expectation maximization assuming a fixed starting bankroll. But if one can assume unlimited leverage, and one has a signal for a price ...
12
votes
3answers
679 views

What are some research articles on using principle components to generate alpha?

Here's an example by Marco Avellenada from NYU titled "Statistical Arbitrage in the U.S. Equities Market". The idea of this paper involves capturing mean reversion in the residual returns of a ...
11
votes
3answers
455 views

What is a commonly accepted econometric model for volume?

What is the gold standard econometric model for volume? For example, a common model for price is the autoregressive (AR) model with GARCH(1,1) innovations. Do you know of any good survey articles ...
11
votes
2answers
1k views

How to build a regime-switching model which knows its own limits?

In recent months I've come to the conclusion that there are not only certain regimes in the markets (like bear or bull) but phases where all models fail because we are in uncharted territory. The ...
11
votes
2answers
1k views

Modelling with negative interest rates

For a project, I am interested to model the impact of recently negative interest bonds on the portfolio. The literature on modelling negative interest rates is limited, and the only theory I could ...
9
votes
4answers
179 views

Are there any valuation models of securities that use hyperbolic discounting?

To quote Wikipedia: In hyperbolic discounting, valuations fall very rapidly for small delay periods, but then fall slowly for longer delay periods. This contrasts with exponential discounting, in ...
9
votes
1answer
476 views

What to ask for in a good prototyping framework?

Reading up on quantitative methods, model development, and back-testing, one obvious question springs to mind: What should one ask of a prototyping (model testing) framework? I know a lot of people ...
9
votes
1answer
409 views

Fixed income modeling

I am currently working on my research paper and trying to explain a two-dimensional variable: volume and instrument of corporate debt financing. Independent variables that I believe must be included ...
8
votes
1answer
771 views

How to 'calibrate' simple pricing models for equity index options and equity options?

I am interested in doing some research on plain vanilla equity options and equity index options. I have historical data for these options. I also happen to have market maker 'fair price' (bid and ask) ...
7
votes
5answers
1k views

What distribution to assume for interest rates?

I am writing a paper with a case study in financial maths. I need to model an interest rate $(I_n)_{n\geq 0}$ as a sequence of non-negative i.i.d. random variables. Which distribution would you advise ...
7
votes
3answers
310 views

How to improve the consistency of explained variance statistics in a linear equity model?

I have an intraday equity returns linear model that, overall, shows good values in terms of $R^2$, p-value and other explained variance statistics. Around 70% of the stocks show consistent R-squared ...
7
votes
1answer
383 views

Do people use unbounded interest rate models, and what alternatives exist?

A simple interest rate model in discrete time is the autoregressive model, $$ I_{n+1} = \alpha I_n+w_n $$ where $\alpha\in [0,1)$ and $w_n\geq 0$ are i.i.d. random variables. When working with ruin ...
7
votes
1answer
465 views

How to model time series of illiquid stocks - 400 observations (transactions) per 8 hours?

How to model time series which are illiquid - 400 observations (transactions) per 8 hours ? Are there models suitable for this situation which incorporate not only size of the transactions but also ...
7
votes
3answers
182 views

How to justify a model that could not predict external factors?

I'm building some models, for example, Bad Loan (NPL) rate. It's based on historical simulation method -- basically it's saying the future behavior could be predicted by history data. However, this ...
7
votes
1answer
3k views

What are the main differences between discrete and continuous time models when modeling asset price dynamics?

My intuition says that both approaches, discrete time models and continuous time models will be models (i.e. approximations) of reality. Therefore it should be possible to develop useful models in ...
7
votes
1answer
272 views

Inflation modelling

I am trying to price an option on the Spanish CPI. The option is a European call with a single observation date. However, I am fairly new to inflation modelling, so there are two areas in which I ...
6
votes
7answers
330 views

Are the sin, cos, tan functions used in some financial calculations?

I ask because those functions are on the TI BA II Plus financial calculator.
6
votes
3answers
530 views

How to account for jumps in intraday data when calculating beta?

I am calculating betas on intraday trade data at 15-minute intervals. For simplicity sake, let's assume I am modeling \begin{equation} Y = \beta * X + c \end{equation} where $Y$ is the return of XLF ...
6
votes
5answers
2k views

Predicting Price Movements on a Betting Exchange

On a betting exchange the price (the odds that an event will happen expressed as a decimal, 1/(percentage chance event occurring) of a runner can experience a great deal of volatility before the event ...
6
votes
2answers
522 views

Should I use currency hedged or unhedged returns for a global equity allocation model?

I am building a global tactical equity allocation model. The model will help determine an optimal allocation amongst a number of major developed and emerging stock markets (represented for my purposes ...
5
votes
2answers
613 views

What are common methods for modeling intraday trading volume?

What are the most common ways to model intraday trading volume, particularly for futures contracts? There are obviously a number of seasonal-type factors, like roll, economic news releases, time of ...
5
votes
5answers
2k views

How many explanatory variables is too many?

When researching any sort of predictive model, whether using ordinary linear regression or more sophisticated methods such as neural networks or classification and regression trees, there seems to ...
5
votes
1answer
762 views

Can the Heston model be shown to reduce to the original Black Scholes model if appropriate parameters are chosen?

Summary For Heston model parameters that render the variance process constant, the solution should revert to plain Black-Scholes. Closed from solutions to the Heston model don't seem to do this, even ...
5
votes
1answer
235 views

Multiple comparison problems

I recently read a blog entry where some statistics were generated for a common technical analysis indicator. Below is the link. My question shows up close to the bottom under the name bill_080, in ...
5
votes
1answer
395 views

Looking for a recommendation for a Fund Transfer Pricing modelling book

Recently I started working in a bank as a modeler, one of the possible topic is FTP - Fund Transfer Pricing. After I studied that subject a little on wiki and read a website or two in that field I ...
5
votes
1answer
761 views

Problems with dealing with GARCH models and intra-day data

Short question would be "Which type of model from GARCH family is most suitable for modeling 5-minute data returns ?" but I've added some story to it. Long time ago I was preparing my thesis, one ...
5
votes
1answer
450 views

What is the forward rate for a Black-Karasinski interest rate model?

I was wondering if anyone could help me with the instantaneous forward rate equation for a Black-Karasinski interest rate model? I was also after the Black-Karasinski Bond Option Pricing Formula.
5
votes
2answers
165 views

Risk neutral Esscher transform of exponential Levy processes

Let $X_t$ be a Levy Process and $e^{X_t}$ the corresponding exponential Levy process. Using the Esscher transform for a change of measure for which the Radon-Nykodym derivative is ...
5
votes
0answers
981 views

VaR model Unconditional Coverage Tests: Is this extension of Kupiec POF test correct?

Background: Kupiec P. in 1995, published paper "Techniques for Verifying the Accuracy of Risk Management Models" on Journal of Derivatives, v3, P73-84, it's a Unconditional Coverage Tests designe for ...
4
votes
3answers
392 views

Is it possible to demonstrate that one pricing model is better than another?

Take the classic GBM (geometric Brownian motion) model for equities as an example: ds = mu * S * dt + sigma * S * dW. It is the basis for the classic ...
4
votes
7answers
1k views

Recommendation for a book on CVA/Credit Risk and PD/LGD/EAD modeling?

I need suggestions for some good books on the following topics: Credit Value Adjustment (CVA) / Credit Risk Probability of Default / Loss-Given-Default / Exposure-At-Default modeling Any pointers ...
4
votes
1answer
889 views

Simple model for option premium (for covered call simulation)?

Given a historical distribution of weekly prices and price changes for a stock, how can I estimate the the option premium for a nearly at-the-money (ATM) option, say with an expiration date 3 months ...
4
votes
1answer
211 views

Modeling interest rates with correlation

I'm trying to model interest rates, and will use the following equation: $dr = \mu r dt + \sigma r dW $ I'm also being told that interest rates are 40% correlated to S&P returns. How can I ...
4
votes
1answer
483 views

Coin Toss System

Coin Toss Runs Calculator The expected number of runs for two consecutive heads or tails is 3. Is there an edge if we place a progressive constant size bet(limited to 3 times)for consecutive ...
4
votes
1answer
2k views

How to tune Kalman filter's parameter?

I plan to use Kalman filter to estimate saving account amount. However, I'm a bit lost at how to tune the filter's parameters. Taking as the example from the Wikipedia page, basically there are ...
4
votes
1answer
424 views

Discrete time Ho lee model

This is my first question in this forum. I am stuck with my current testing the Ho Lee model. I am having difficulty computing the perturbation factor $\Delta$. The ho lee model should be completely ...
4
votes
0answers
184 views

Algorithmic Trading Model Calculation and Stale Data

I'd like ask everyone a more concurrency programming but definitely quant-finance related question. How do you deal with staleness of data in market hours as quote ticks are streaming and your model ...
4
votes
0answers
664 views

Help With Quant Modelling Software

Im a software developer (freelance) working in investment banking, and I'm looking to improve my CV by gaining a better understanding of the financial quant role and the software used by quants to ...
4
votes
0answers
471 views

Algorithms for predicting a couple points in the future

I'm familiar with supervised learning algorithms like regression and neural networks which look at a bunch of input points and learn a function which outputs a value (the value varying depending on ...
3
votes
5answers
270 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
3answers
2k views

relation between asset's and equity volatilities - merton model

In terms of Merton credit risk model need to find the initial value of counterparty's assets and the volatility of the assets. Both value are not directly observable thus we have to approximate them ...
3
votes
2answers
108 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 ...
3
votes
1answer
553 views

What are some applications of bioinformatics or genetics to generating alpha in U.S. equities?

There are many disciplines that have contributed to how one model's risk and return. Physics introduced Brownian motion and RMT. Machine learning has helped to solve complex portfolio construction ...
3
votes
1answer
88 views

What's the underlying idea of definition of constrained market in Skiadas' Asset Pricing Theory?

I'm self-studying Skiadas' Asset Pricing Theory, and find the definition of constrained market on page 21 confusing(you can find it here in the sample chapter). Deļ¬nition 1.26. A constrained ...
3
votes
1answer
348 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
116 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
261 views

How to use volatility to assess the accuracy of a stock market model?

Background: For a dissertation I have a multi-agent stock market model that I am using to assess different mechanisms for producing particular dynamic regimes. A key point is assessing how closely it ...
3
votes
0answers
99 views

“Stable-Floating” model for non-maturing deposit for FTP purpose

Non-maturing deposits (NMD) is a deposit without maturity date. The deposit rate is normally low. Banks could adjust the rate at any time. The customer can withdraw without penalty, however, in real ...