# 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 570 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 204 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 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 233 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 174 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 175 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 279 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 414 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 178 views ### Max option leverage strike Since options represent leveraged stock investments, at which strike K does a European option provide maximum leverage? Hereby define leverage L as ratio of Delta/Optionprice: ... 0answers 105 views ### 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 ... 0answers 187 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 580 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 304 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 850 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 612 views ### 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 ... 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 313 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 289 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 167 views ### Markov-Switching Multifractal and FX Rates Is there a better model than Markov-Switching Multifractal (MSM) for detecting regime shifts in FX rates across multiple time horizons? I am especially interested in the different aspects of the ... 0answers 54 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 91 views ### pdf of simple equation, compound Poisson noise I would like to find the probability density function (at stationarity) of the random variable X_t, where: \begin{equation*} dX_t = -aX_t dt + d N_t, \end{equation*} a is a constant and N_t is a ... 0answers 101 views ### Computing Value at Risk for portfolio in R I know how to compute VaR with long positions using PerformanceAnalytics. What about a portfolio consisting in two equities A and B, 100 USD long positions in each, and 2 stock options for the same ... 0answers 83 views ### Transition densities in the Heson model Knowing the Characteristic function \Phi_{T,t} = \mathbb{E} [ e^{i u S_T} | S_t, V_t] (or equivalently, the Laplace transform) of an affine process, it's possible to know the distribution of the ... 0answers 155 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 187 views ### What is the most convenient data structure for backtesting a model of futures options prices? I have an empirical model for the dynamics of futures prices in a particular market that I have implemented using a long series of the front five contracts. (I account for the roll in my model.) I ... 0answers 149 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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### 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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### 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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### is there a mapping from Altman Z-score for private companies to bond ratings or probability of default?

On wikipedia, there is a formula to calculate the Altman Z-score for private companies: Z-score estimated for private firms: T1 = (Current Assets − Current Liabilities) / Total Assets T2 = Retained ...
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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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### 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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### portfolio optimization averaging weights, what are benefits?

I'm playing around with different portfolio optimization techniques. Amongst others I was also looking at the resampling method, especially the one described in Meucci. I have two general questions ...
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### Why is it useless to model stochastic volatility when pricing Vanilla style derivatives?

With respect to the answer by user AFK in Ideas about Stochastic volatility models. I am specifically interested in interest rate options (IR Caps/Floors and Swaptions).
In their seminal paper Jegadeesh and Titman (1993) develop a statistical model to infer where moment comes from. In practice they setup the following: $r_{it}=\mu_i + b_i f_t +e_{it}$ ...