# 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 426 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 519 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 227 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 75 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 179 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 170 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 274 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 458 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 410 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 183 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 2k views ### 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 ... 0answers 555 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 298 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 804 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 169 views ### Covariance estimation Shrinkage was much en-vogue before RMT took everybody's attention, however the latter also showed its limits. A plethora of other estimators has been presented, but I could not yet spot a golden ... 0answers 2k 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 307 views ### 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 ... 0answers 284 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 84 views ### Max option leverage Since options represent leveraged stock investments, at which strike K does a European option provide maximum leverage? Hereby define leverage as ratio of Delta/Optionprice. You can assume all ... 0answers 51 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 134 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 147 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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### Formula for the efficient portfolios (mean-variance optimisation)?

Consider the setting of mean-variance portfolio optimisation: $n$ assets with expected returns $\overline{r}_1,...,\overline{r}_n$ and standard deviations $\sigma_1,...\sigma_n$. For a certain fixed ...
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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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### Testing Valuation, Size and Momentum (proprietary factors) from 1988-2013: No evidence of driving cross-sectional returns

I am currently testing whether three proprietary factors - Valuation, Size and Momentum - explain cross-sectional returns. A sample of 3000 securities was tested using Fama-MacBeth two-pass ...
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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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### Is Least Median Squares (LMS) regression commonly used in Finance?

Least Median Squares is often argued to give more stable results than does OLS. Whereas in OLS one minimises the mean of squared residuals, in LMS, one instead minimises the median of squared ...
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### Why is Weighted Least Squares necessary in fundamental factor model?

Why is Weighted Least Squares necessary in fundamental factor model while it is not in a standard Macroeconomic factor model? I understand that $\mathbb{E}[\epsilon^2_{it}]=\sigma_i^2$ varies across ...
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### Integral-differential equation for forward rates

I am struggling in this question: Let $P(t,T)$ denote the price of a zero-coupon bond (with marturity at time $T$) at time $t \in [0,T]$. As usual, at time $t$ for maturity $T$, the forward rate is ...
I'm interested in the term structure of CDS spread. It's known that the Market CDS rate (fair CDS spread or T-maturity spread) of a CDS contract initiated at $s$, maturity $T$ and recovery function ...