6
votes
1answer
615 views

When does the Epps effect start?

Wikipedia defines the Epps effect as follows: In econometrics and time series analysis, the Epps effect, named after T. W. Epps, is the phenomenon that the empirical correlation between the returns ...
4
votes
2answers
2k views

What is the best alternative of Quantlib library

We need to build a Fixed Income Portfolio Risk Analytics solution. Somehow due to administrative reason we can't use Quantlib which is written in C++, even call it through SWIG via JNI. We have tried ...
0
votes
1answer
147 views

Bond duration as estimation to holding return

I am really struggling to prove to myself that when we can estimate the one-year holding period return for a three-year zero by using the following estimation: S3 - Duration2*(f1,3- S3) Where Sn is ...
9
votes
1answer
464 views

What good papers of short term (<30 seconds) volatility estimation [duplicate]

I am looking for good papers of short term (<30 sec) volatility estimation AND short term volatility forecasting. Do you have something in mind ?
2
votes
3answers
587 views

Time Series or Regression

I'd like to research the impact of certain events and characteristics on the liquidity of the stocks over time. I've got a sample of 200 stocks and I use several measures of liquidity (Amihud, Bid-Ask ...
0
votes
2answers
487 views

Volatility Scaling

Since the VIX is an annualized volatility, to convert it into other frequencies we must divide by the square root of time. So to convert a VIX of 15 into daily volatility, we would need to divide $$ ...
0
votes
1answer
99 views

Plain vanilla risk parity with trends forecasting power

I have built an asset allocation model (plain vanilla risk parity) but I would like to adapt the initial asset allocation with respect to potential futures changes in the trends of the assets under ...
1
vote
1answer
156 views

What's wrong with this asset growth simulation?

Sorry if this is too basic, but I have this spreadsheet that simulates asset growth of a portfolio under a given return and risk using MPT. Here is a plot of probability distribution of asset ...
1
vote
1answer
2k views

How to apply Ljung Box Test?

I am checking the closing prices(about 9000+ prices) of the stocks data to test for randomness. The test I am using is Ljung Box test, in MFE toolbox for MATLAB, I used 300 data of closing prices, ...
3
votes
2answers
368 views

Question on yield curve fitting from Wilmott on Quant Finance p.529

My last question is related. At the top of p. 529, it says, "From the Taylor series expansion for $Z$ we find that the yield to maturity is given by $$-\frac{log Z(r,t;T)}{(T-t)}\approx-a+\left(\...
1
vote
0answers
252 views

Quadratic utility function

May you can help me undertanding the following conclusion: Suppose we have an agent who has preferences over contingent claims, represented by a concave function $U$. This simply means that $\mathbb{E}...
1
vote
1answer
2k views

VaR for FX forwards

I am trying to figure out some of the commonly used approaches to deal with FX forwards (in a currency portfolio containing spots, forwards and swaps) that would allow me to calculate the one day VaR ...
0
votes
0answers
121 views

Modelling interest rate: AR(2) modelling

I have a time series of spread that follows an $AR(2)$ (Autoregressive model of Order 2). I need an interest rate model that represents that dynamics. What model should I use?
4
votes
1answer
544 views

Yield curve fitting example in Wilmott on Quant Finance p.528

In Wilmott on Quantitative Finance Vol. 2, p. 528, Section 31.4.2, is given a power series expansion for a zero coupon bond $$Z(r,t;T)=1+a(r)(T-t)+b(r)(T-t)^2+c(r)(T-t)^3+\dots$$ then it says to ...
0
votes
1answer
128 views

Physical Option Implied Distribuition

So I got risk neutral probabilities from stock option prices. How can I then map them to a physical measure?
1
vote
1answer
886 views

Breakeven of a delta-hedged option

Basic question to which I surprisingly did not find an answer on here. What's the best approximation to the break-even (with respect to stock price) for an option that was hedged fully at point of ...
1
vote
2answers
76 views

Is “Issuer and Holder with same strike” meaningless?

I've seen a callable putable bond whose first exercise date is an exercise date both for the holder and the issuer. Moreover both strikes have the same value: 100. I wonder what does it mean. I ...
3
votes
1answer
285 views

Effective anti-gaming controls in dark pools

What are some indicators that a dark pool operator has effective anti-gaming controls in place? There are some that prohibit IOCs (immediate or cancel) but is that necessary? It seems like that could ...
2
votes
0answers
306 views

Obtaining the default probability and recovery rate for each credit rating?

I have the following questions for obtaining the credit rating: Given that I have cumulative default probability of each credit rating from Global Corporate Average Cumulative Default Rates (1982-...
1
vote
0answers
621 views

Question about Merton model to estimate default probability and recovery rate of the company

I recently come across Merton's model to estimate the default probability and recovery rate of the company. Here is the inputs ...
1
vote
1answer
249 views

Why use leverage when it does not improve the risk/reward ratio? [closed]

Leverage will increase gains when things go right but will also increase losses when things go wrong. Mathematically speaking, it does not change the risk/reward ratio (or does it?). Since investing/...
1
vote
1answer
141 views

Is it better to hedge or reduce the position size? [closed]

Traders hedge to reduce their risk. However, wouldn't reducing the position achieve the same results while keeping the risk management process simpler? At least, one need not worry about making the ...
1
vote
1answer
89 views

Can you hedge a derivative with a CASH|spot product or does it have to be another derivative instrument

Consider you have a SWAP (any kind) to hedge this SWAP, you will most likely use another Derivative,but can you use a cash|spot product to hedge this. Like Cash Equity or FX Spot
6
votes
0answers
137 views

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?
0
votes
1answer
74 views

how to extract moments of GB from moment generating function?

I'm searching for the moments of geometric brownian motion using the gmm optimization program. the aim is to make the process y(t) of returns follows a normal distribution Are there any packages in ...
3
votes
1answer
157 views

Integration of stochastic total derivative

Super basic question. I think I am doing this correctly, but just want a sanity check. Say I have a stochastic process $r(t)$. Say I have an equation $$d(e^{\beta (t-s)}r(s))=\dots$$ where the $...
1
vote
0answers
113 views

Does it make sense to apply complicated mathematics to calculate with precision when the margin of error is +/-10%? [closed]

This is more of a philosophical question than general question. Quantitative finance applies highly complicated mathematics and has attracted very smart people to this field lately given the high pay ...
0
votes
1answer
555 views

backtesting with open, close, high and low

I am quite notice at the business of backtesting for an automated strategy. I was wondering, can I/should I use High and Low for this purpose? On one hand, the algorithm will see these prices, but on ...
3
votes
1answer
486 views

Pricing Fixed-To-Floater bond in QuantLib

Wandering through QuantLib's Financial instruments documentation, I noticed no class for fixed-to-floater bonds exist. Then I was wondering what a suitable way to price such an instrument would be ...
3
votes
2answers
491 views

Question about the rationale of applying certain recovery rate by ISDA

According to ISDA standard (also here), the recovery rate for senior unsecured is 40%, that of subordinate is 20%, and emerging markets is 25% (both senior and subordinate). I wonder the rationale of ...
2
votes
1answer
208 views

interest rate in cost of carry

What interest rates are used in practice in a stock index / futures arbitrage? I've seen cases, when the assumed rate is 3 months LIBOR, but does it mean, that everyone who does the arbitrage can ...
0
votes
1answer
316 views

adjusted close prices on SP500

When I look at the adjusted close prices of SP500, for example, I notice that the numbers are always significantly below the actual closing. In the explanation of what adjusted prices are, one gets ...
3
votes
1answer
551 views

How does the 2-factor Hull White model propagate the forward rates curve?

I've been trying to get a grasp on some of the basics of interest rate modeling, and am looking to simulate rates using the 2 factor Hull White model, which I am aware offers a more realistic model of ...
7
votes
1answer
530 views

Practical Usage of Wavelets with Real Time Data

There are a lot of papers out there which make attempts to forecast or discuss the benefits of wavelets for frequency decomposition. Oddly, very few discuss the huge boundary effects that are present ...
4
votes
1answer
260 views

Can option prices be characterised by an ODE?

If a stock price, $S(t)$, is governed by a geometric brownian motion. Is it possible to characterise the value of an option $V(S,t)$ as an ODE rather than a PDE (given $S$ is itself a function of $t$)?...
4
votes
3answers
710 views

Concave volatility smile

Under what circumstances can implied volatility smile be concave (ATM implied volatility higher than OTM put and call)? I know that a slight concavity is not prohibited by no-arbitrage... What are ...
12
votes
0answers
268 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 ...
8
votes
0answers
708 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 ...
1
vote
1answer
620 views

How to derive zero-coupon rates from IRS?

How can I calculate zero-coupon rates from historical IR swap rates? I have a record of IRS for the past 4000 days and I am want to compute the zero coupon rates based on them.
2
votes
1answer
659 views

Additive portfolio risk decomposition

In his paper Budgeting and Monitoring the Risk of Defined Benefit Pension Funds, Bill Sharpe writes: [...] the sum of the weighted marginal risks of the portfolio components will equal twice the ...
1
vote
0answers
185 views

Forecasting Equity returns using state-space models

I have data for 3 yrs of 5 min prices of various equities. I can construct a linear regression model and try to see the in-sample model performance. But I was wondering whether fitting a state-space ...
2
votes
2answers
771 views

What Forex Services support the ForexConnect API?

I need API access to get ForEx tickers and order books for currency pairs. From what I can tell there is a .Net API called ForexConnect which I can use to get this data. Now where can I get this data ...
0
votes
1answer
213 views

Asynchronous Data Across Time Zones - RiskMetrics

I'm currently involved with a project to integrate RiskMetrics into our business and one issue we've identified is the treatment of market data timing across time zones. This can have the effect of ...
1
vote
0answers
89 views

Adjusted option prices?

I am trying to calculate IV of options for a ticker over the last 10 years. Problem is that some option prices don't make sense (for example, closing price \$31.94, but 30-day call option with 18 days ...
1
vote
1answer
219 views

Control variate for Heston model

Does anyone have suggestions for potential control variates for vanillas in a Heston model? I've tried black scholes with implied volatility, average volatility and long term volatility all without ...
11
votes
3answers
3k views

Why are there still manual market makers in options

Why are manual market makers still predominant in options markets? Why haven't algorithms replaced these market makers, as they have for liquid stocks for example?
4
votes
1answer
677 views

FIX binary decoder

Not sure if this is the right question board for this - It sounds like CME is switching their MDP platform from FAST to Simple Binary Encoding and it will be going to production soon. Does anybody ...
3
votes
1answer
146 views

Binomial lattice convergence

How do I measure how quickly a binomial lattice converges to an option value as the number of steps is increased? I'm charting option value versus number of steps for various binomial lattice models ...
0
votes
2answers
293 views

Stat Arb Equity Pair Position Trigger

I am new to pairs trading and am in the process of constructing the code for backtesting a basic pair trading strategy. While I understand the basic idea behind the pair trading strategy, I am having ...
0
votes
0answers
53 views

What mean factor behind a yield?

When quoting a yield of a transaction e.g. yield 3.8% behind the yield it is quote "factor" - in this case of a yield of 3.8% it is mentioned in brackets (factor 26.11) . The lower the yield the ...

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