# All Questions

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### How to show that this weak scheme is a cubature scheme?

Weak schemes, such as Ninomiya-Victoir or Ninomiya-Ninomiya, are typically used for discretization of stochastic volatility models such as the Heston Model. Can anyone familiar with Cubature on ...
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It is known (see for example Joshi-Chan "Fast and Accureate Long Stepping Simulation of the Heston SV Model" available at SSRN) that for a CIR process defined as : $$dY_t= \kappa(\theta -Y_t)dt+ ... 0answers 388 views ### performance of historical VaR parameters An historical VaR measure is parameterized in terms of the confidence level and also number of periods. Specifically, the \alpha% T-period VaR is defined as the portfolio loss x in market value over ... 0answers 469 views ### Probability distribution of maximum value of binary option? A binary option with payout \0/\100 is trading at \30 with 12 hours to expiration. Assuming the underlying follows a geometric Brownian motion (hence volatility remains constant), what ... 0answers 207 views ### Extreme Value Theory possible for portfolios with options? Say you have a portfolio with long exposure to a few linear assets (stock indices) and short exposure to a nonlinear asset (say call options on one of the linear assets). I am interested in ... 0answers 252 views ### Optimization procedure for entropy pooling I was wondering if those who used the entropy pooling code provided by Attilio Meucci had issues with the optimization procedure (especially regarding the fminunc function in Matlab). When I stress ... 0answers 409 views ### Alternative ways to understand time-varying comovement between two time-series? I have been looking into ways to better understand how the dependencies/correlations/etc between two time series can vary over time. I first thought about using a Kalman/particle filter over a ... 0answers 393 views ### Can we use White's reality check to compare two Sharpe ratios? I read a paper from Ledoit and Wolf that proposes a method to compare two Sharpe ratios and a paper from White that proposes a method to compare n trading rules. My question is: Can we use White's ... 0answers 119 views ### Quantum Mechanics and Economics… What I was reading this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2002698&download=yes The author has the model presented here: ... 0answers 140 views ### Here is an approach for measuring Data Snooping; is it new? I came up with an approach for measuring data snooping, or overfitting. My question is whether this approach was published and expanded-on already, or is it new? My approach relies on the observation ... 0answers 170 views ### Proving the asymptotic distribution of Manipulation-Proof Performance Measure (MPPM) (Paper by Goetzmann et al.) In Goetzmann et al.'s (2007) paper, the authors derive a "Manipulation-Proof Performance Measure" (MPPM), which is a performance measure that is impervious to performance manipulation by fund ... 0answers 510 views ### Examples of Spectral Risk Measures Let's take the usual definition of a spectral risk measure. If we look at the integral we see that spectral risk measures have the property that the risk measure of a random variable X can be ... 0answers 277 views ### Implied term structure from risky discount curve: does it make sense? We know that, taken every discount curve, it's possible to calculate its forward rates according to our tenor preferences. We know also that it's actually possible to extract an implied term ... 0answers 726 views ### What are modern algorithms for trade classification? When dealing with trade data, for example from TAQ, a common problem is that of determining whether a trade was a buy or a sell. The most commonly used classifier is the Lee-Ready algorithm (Inferring ... 0answers 1k views ### Volatility-Based Envelopes I am following an article by Mohamed Elsaiid (MFTA) about Volatility-Based Envelopes - a quite new technical indicator he has introduced, that is being used by Bloomberg. My goal is to get a simple ... 0answers 272 views ### Transformation of Volatility - BS I have recently seen a paper about the Boeing approach that replaces the "normal" Stdev in the BS formula with the Stdev \sigma'=\sqrt{\frac{ln(1+\frac{\sigma}{\mu})^{2}}{t}} ... 0answers 27 views ### Are there references about liquidation, transaction, market impact costs in portfolio optimization I am looking for some references treating of what I would call liquidation cost market impact cost transaction cost(*) in the usual "portfolio optimization problem under linear constraints". Let ... 0answers 38 views ### Does price of american (put) option exhibit smooth pasting in time direction under B-S model? Let us consider the BS model and let f(s,t) denote the price of an American put option with t to expiry, then it is known the solution of the optimal stopping (when it is risk neutral) related to ... 0answers 102 views +100 ### Why do people always seek finite-variance models for option pricing For the purpose of getting fatter tails than the Guassian, I have seen people for example use \alpha-stable processes to model the stock. But in that case they end up using 'tempered' versions of ... 0answers 108 views ### For which instruments performs SABR/LMM better than LMM? For which class of instruments the SABR/LIBOR Market Model does perform better than the classical LIBOR Market Model? The LIBOR Market Model The LIBOR Market Model — also known as Brace, Gatarek, ... 0answers 138 views ### American Swaption Heding with Malliavin Calculus Hedging American Swaption Hello, I priced an American swaption using Black model with swap rates diffusion to find the european (call) price at t.$$ C_t = (\delta \sum_{j=n+1}^{M+1} ...
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Seeing how very few actually read the Quant Finance meta I intentionally post it here on the main site. To the more powerful admins: could you leave it here for a day or two and move it to meta ...
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### 2-state HMM / ARMA process?

I have issues with this problem: Let $\{X_t, t\in \Bbb N\}$ be a 2-state stationary Markov chain, with transition $M$ (and $M(1,2)\neq 0 \neq M(2,1)$), let $\{W_t, t\in \Bbb N\}$ be a strong Gaussian ...
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### Algorithm to fit AR(1)/GARCH(1,1) model of log-returns

I am fitting numerically an AR(1)/GARCH(1,1) process to index and stock log-returns, $r_t=\log(P_t/P_{t-1})$, where $P_t$ is the price at time $t$, and thus far am not clear on where the observed log ...
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### Applications of distance correlation

This question mentions distance correlation. Where has this concept been applied to financial data and provided new insight? Do you know any examples or references?
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### Basket option density in BS model

Let X and Y be two GBM’s, they have each a univariate log-normal distribution for some time t, that is $X_t\sim{LnN(µ_x, σ^2_x)}$, $Y_t\sim{LnN(µ_y, σ^2_y})$ and $Z_t=[X_t,Y_t]\sim{ MvLnN(μ, Σ)}$ ...
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### Stress testing covariance

Going one level beyond stressed scenarios, to parameters e.g. for a VaR measure: what are the most common approaches for stressing a covariance/correlation matrix, especially taking portfolio exposure ...
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### 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 ...
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### option chain data visualization, sunburst

I think option chains are not represented in the best way. With more and more options products coming out and trading on the various exchanges, I see vendors struggling to keep up with a good way to ...
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### Basel CVA VaR with R/WWR

In Basel III the CVA VaR “is restricted to changes in the counterparties’ credit spreads and does not model the sensitivity of CVA to changes in other market factors, such as changes in the value of ...
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### Testing for stock market herding over short periods

The literature has well established methods for testing stock market herding over a decent time window. Are there any ways that have appeared in the literature to test for stock market herding over ...
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### generating (or tracking) the DJUBS commodity index

Dow Jones and UBS publish one of the most popular commodity index families, the Dow Jones-UBS Commodity Index and its subindices. They provide a detailed manual describing the composition of the index ...
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### Alternative to Block Bootstrap for Multivariate Time Series

I currently use the following process for bootstrapping a multivariate time series in R: Determine block sizes - run the function b.star in the np package which produces a block size for each series ...
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### Calculate interest rate swap curve from Eurodollar futures price

So I was reading Robert McDonald's "Derivatives Markets" and it says Eurodollar futures price can be used to obtain a strip of forward interest rates. We can then use this to obtain the implied ...