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15
votes
2answers
1k views

Why isn't the Nelson-Siegel model arbitrage-free?

Assume $X_t$ is a multivariate Ornstein-Uhlenbeck process, i.e. $$dX_t=\sigma dB_t-AX_tdt$$ and the spot interest rate evolves by the following equation: $$r_t=a+b\cdot X_t.$$ After solving for $X_t$ ...
7
votes
1answer
258 views

What are some quantitative ways to obtain the view confidences in Idzorek's version of Black-Litterman?

I'm using Idzorek's version of the Black-Litterman model for estimating asset returns. Idzorek's version bypasses the need to estimate directly the covariance matrix $\Omega$ of errors in the various ...
4
votes
0answers
748 views

Help With Quant Modelling Software [closed]

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
1answer
159 views

What are some common models for one-sided returns?

One typically models the log returns of a portfolio of equities by some unimodal, symmetric (or nearly symmetric) distribution with parameters like the mean and standard deviation estimated by ...
5
votes
1answer
227 views

Can binary model lead to non-normal distribution?

If we suppose an instrument goes up or down 1 tick per $\Delta t$ (binary model), its long term distribution will be normal, per the Central Limit Theorem. However, suppose we model as follows: The ...
8
votes
1answer
684 views

Monte carlo portfolio risk simulation

My objective is to show the distribution of a portfolio's expected utilities via random sampling. The utility function has two random components. The first component is an expected return vector ...
9
votes
1answer
248 views

How should FX options be priced when a currency is artificially capped?

The question is inspired by yesterday's (06/09/11) historic announcement by the Swiss National Bank that it would impose a ceiling on the franc of 1.20 against the euro. I would like to know if there ...
8
votes
1answer
541 views

What methods do I need to learn in order forecast asset price movements?

What are the standard models used to forecast asset price movements? For example, if I were to trade an option, what model would I use in conjunction with option pricing models to forecast the stock ...
5
votes
2answers
216 views

Question about equations and risk factors.

Say I have two risk factors $X_1$ and $X_2$. Standard deviation for $X_1$ is $\sigma_1$ and $\sigma_2$ for $X_2$. Furthermore, $X_1$ has a mean of $\mu_1$ and $X_2$ has a mean of $\mu_2$. Correlation ...
5
votes
1answer
184 views

How to scale option pricing components in regard to time

I am looking at closed-form options approximations, in particular the Bjerksund-Stensland model. I have run into a very basic question. How should I scale the input variables in regard to time? My ...
15
votes
6answers
2k views

George Soros models

Mr. Soros in his books talked about principles which are not used by today's financial mathematics — namely reflexivity of all actions on the market. Simply it can be given by following: ...
7
votes
3answers
962 views

Does the gamma function have any application in quantitative finance?

I was looking into the factorial function in an R package called gregmisc and came across the implementation of the gamma function, instead of a recursive or iterative process as I was expecting. The ...
12
votes
3answers
696 views

Discrete-time model: stock dynamics

I am working in the area of probability theory and for a case study I would like to make some calculations in finance. Since I am developing theory for the discrete time, I am interested in models for ...
8
votes
1answer
392 views

Are there any standard MBS coupon stack models?

I need to model MBS coupon stack prices. It would not be difficult to create something from scratch, but I don't want to re-invent the wheel (and explain why I did) if a somewhat standard model ...
37
votes
7answers
3k views

Paradoxes in quantitative finance

Everyone seems to agree that the option prices predicted by the Black-Merton-Scholes model are inconsistent with what is observed in reality. Still, many people rely on the model by using "the wrong ...
16
votes
5answers
836 views

Model Validation Criteria

Let's say I have a brand new fancy model on some asset class (calibration porcedure included over a set of vanilla options) in which I truly believe I made a step forward comparing to existing ...
11
votes
3answers
817 views

Operating parameters of market makers?

I'd like to get a feel for the operating parameters of official market makers. I'm looking more for discerning characteristics, rather than exact numbers or an exhaustive list of each MM. Examples: ...
12
votes
4answers
3k views

Is there a standard model for market impact?

Is there a standard model for market impact? I am interested in the case of high-volume equities sold in the US, during market hours, but would be interested in any pointers.